Do Unpaid Property Taxes Affect Credit?

Property ownership carries the responsibility of paying property taxes, which are levied by local governments to fund public services. Many property owners wonder how unpaid property taxes might influence their credit standing. Understanding the connection between delinquent property taxes and credit reports involves examining the stages of non-payment and the actions taken by taxing authorities.

Direct Reporting to Credit Bureaus

Local tax authorities and government entities do not directly report property tax payment information to major credit bureaus. These taxing bodies are not classified as traditional creditors or lenders. Therefore, they do not regularly furnish payment data, including instances of non-payment, to credit reporting agencies.

Simply missing a property tax payment will not immediately appear as a negative mark on your credit report. The primary function of these tax authorities is revenue collection for public services, not credit assessment or reporting.

Tax Liens and Credit Reports

A property tax lien is a legal claim placed on real estate by a government entity when property taxes become delinquent. This lien establishes the government’s priority claim against the property to secure the unpaid tax debt. Historically, public records like tax liens and civil judgments were commonly included on credit reports, which could significantly damage an individual’s credit score.

However, a significant change occurred in credit reporting practices. By April 2018, the three major credit bureaus removed all tax liens from consumer credit reports, following initial changes in 2017. This decision stemmed from the National Consumer Assistance Plan (NCAP), an initiative aimed at improving the accuracy and fairness of credit reporting. Consequently, a property tax lien will no longer directly appear on your credit report or affect your credit score.

Despite their removal from credit reports, tax liens remain matters of public record. Lenders, landlords, or other entities can still discover them through public record searches or title searches, especially during mortgage applications or other secured loan processes.

Collection Actions and Foreclosure

While local tax authorities do not typically report directly to credit bureaus, unpaid property taxes can still indirectly and severely impact your credit through subsequent collection actions. If property taxes remain significantly delinquent, the local government may eventually sell the tax debt to a third-party collection agency or assign it for collection. These collection agencies, unlike the government itself, are entities that often report to credit bureaus.

A collection account reported by such an agency can appear on your credit report and cause substantial damage to your credit scores. Such negative marks can remain on your credit report for up to seven years, significantly hindering your ability to obtain new credit.

The most severe consequence of unpaid property taxes is the possibility of foreclosure. If delinquent taxes are not paid, the government can initiate a process to sell the property to recover the outstanding tax debt. A property tax foreclosure is a public and drastic event that will appear on your credit report, leading to a substantial, long-term reduction in your credit score, potentially by 100 to 160 points. While the tax lien itself may not be on the report, the foreclosure resulting from it will be, having a profound negative impact on your financial standing and future borrowing capacity.