When a Property Is Foreclosed On, Who Pays the Taxes?
Understand how property taxes are handled during foreclosure, who becomes responsible, and what steps ensure taxes are properly addressed.
Foreclosure can be a confusing process, particularly regarding responsibility for unpaid property taxes. A common misconception is that foreclosure wipes away all property-related debts, but outstanding property taxes often require specific handling that can affect both former and new owners. Understanding these tax obligations is important for anyone involved in or observing the foreclosure process.
Tax Liens on Foreclosed Properties
When property taxes go unpaid, the local government taxing authority (like a city or county) gains a legal claim against the property for the overdue amount, plus any interest and penalties. This claim is known as a property tax lien.
Because this lien is attached directly to the real estate, the debt follows the property, not the owner.1Internal Revenue Service. Understanding a Federal Tax Lien It remains secured by the property even if ownership changes. Property tax liens are typically statutory, meaning they arise automatically by law when taxes become delinquent, without requiring immediate court action. Taxing authorities often record these liens in public records to notify creditors and potential buyers of the government’s claim, encumbering the property’s title.
Priority of Liens
A foreclosed property often has multiple liens, which are legal claims securing debts. The order in which these liens are paid from foreclosure sale proceeds is determined by lien priority.
Property tax liens generally hold the highest priority, often called “super-priority.” This means delinquent property taxes, interest, and penalties are typically paid first from the sale proceeds, before other creditors like mortgage lenders. This ensures local governments can collect revenue needed for public services.
For most other liens, priority is usually based on the “first in time, first in right” principle: liens recorded earlier have higher priority than those recorded later. A first mortgage, recorded at purchase, typically outranks second mortgages or judgment liens recorded subsequently.
This priority order dictates how foreclosure sale funds are distributed after covering sale costs. Proceeds first satisfy the highest priority lien (usually property taxes). Remaining funds then go to the next lienholder (often the first mortgage lender), and so on. Lower-priority (junior) liens may receive partial payment or none if funds are insufficient. A foreclosure by a senior lienholder can extinguish junior liens, removing their claim against the property, though the debt might still be pursued personally against the former owner.
Responsibility After the Sale
Once the foreclosure sale is complete and the property title transfers, the responsibility for paying property taxes shifts to the new owner. Whoever holds the title is liable for taxes assessed from the date they take ownership.
During the closing of the foreclosure sale, current property taxes are typically prorated between the seller (often the foreclosing lender) and the buyer. This divides the tax liability based on each party’s period of ownership during the tax year. For instance, if the sale closes mid-year, the seller covers taxes up to the closing date, and the buyer is responsible for taxes from the closing date onward.
The former homeowner is generally no longer responsible for property taxes accruing after the title transfer date. Their obligation ends with their ownership, although they might face other financial issues related to the foreclosure, such as tax implications from debt cancellation or the property transfer itself.2Internal Revenue Service. Topic No. 432, Form 1099-A, Acquisition or Abandonment of Secured Property and Form 1099-C, Cancellation of Debt The new owner assumes the duty of paying all future property tax bills.
Potential Reassessment or Additional Fees
The transfer of ownership through foreclosure can trigger a review by the local tax assessor’s office, which may lead to a property reassessment. Assessors aim to keep property values aligned with market value for tax purposes.
A foreclosure sale price might differ from the previous assessed value. The assessor will consider this sale price, along with other market data like comparable sales, to determine if the property’s assessed value needs adjustment. This could result in a higher or lower assessment, affecting future tax bills. A change might also lead to a supplemental assessment for the remainder of the tax year.
Beyond potential reassessment, transferring a foreclosed property can involve other costs. These may include:
- State or local transfer taxes levied on the transaction.3ABA Section of Real Property, Trust and Estate Law. Transfer and Recordation Taxes in the Context of Foreclosure and Deeds-in-Lieu
- Recording fees charged by the county or municipality to document the deed transfer.
- Outstanding special assessments for specific local improvements (e.g., sewers, sidewalks), which might need settlement or become the new owner’s responsibility.
Methods to Verify Payment Status
For a new owner or interested party, confirming the property tax payment status after a foreclosure is straightforward. The most direct method is contacting the local government office responsible for tax collection, usually the county treasurer or tax collector. They maintain the official records of tax payments and outstanding balances.
You will typically need the property’s parcel number (often called APN or PIN) or the physical address to look up the tax records. This information allows tax office staff to provide the current payment status.
Many local tax offices also provide online portals or databases for public access to property tax information. Users can often search by parcel number or address to view tax bills, payment history, and current balances conveniently.
During the closing process of a property sale, including foreclosure, title companies also verify tax status. They conduct a title search that checks for outstanding taxes and other liens, ensuring taxes are paid up to date and handling the proration between parties. This helps ensure the new owner acquires the property without unexpected prior tax liabilities.