10 Real Estate Taxes and Other Liens

 

LEARNING OBJECTIVES:

Upon completion of this chapter, the student should be able to:

· Define the term lien and give examples of the following types of liens: voluntary, involuntary, statutory, equitable, general and specific.

· Describe and explain the effects of a lien as an encumbrance.

· Give examples of the priority of liens.

· State the differences between general real estate taxes (ad valorem taxes and special assessments.

· Describe the manner in which the assessments and the amount of real estate taxes are determined in your area.

· Read and interpret a real estate tax statement.

· State the procedures for the enforcement of tax liens.

· State the general requirements for filing a mechanic's lien.

· Describe a judgment lien and its effect on title.

· Name the other types of liens discussed in the text and their effects on title.

 

SUGGESTED ITEMS TO BRING TO CLASS:

1. Instructions for how to search the public records in your area for the various types of liens

2. Sample copies, both blank and completed, of the tax assessment notices and the tax bills or tax statements used in your area

3. A copy of the assessed valuation or tax appeal procedures for your area

4. Sample copies of the different types of liens from your area, such as special assessment liens, mechanic's liens and judgment liens

5. Copies of legal notices from local publications and foreclosure notices for the liens discussed in this chapter

 

LECTURE OUTLINE:

I. Lien¾ a charge against property that provides security for a debt of the property owner (See Figure 10.1)

A. Encumbrance¾ any charge or claim that burdens the title to real property, including liens and non-monetary claims

B. Liens may be voluntary or involuntary, statutory or equitable, and general or specific.

C. General liens¾ affect all property owned by a debtor, both real and personal

1. Judgment liens

2. Estate and inheritance tax liens

3. Debts of a deceased person (decedent)

4. Corporation franchise tax liens

5. Internal Revenue Service (income) tax liens

6. A lien attaches to real property the moment it is filed.

7. A lien does not attach to personal property until that property is seized.

D. Specific liens¾ affect only one identified parcel of real property

1. Real Estate tax (ad valorem tax) liens

2. Special assessment liens

3. Mortgage liens

4. Trust deed liens

5. Mechanic's liens

6. Utility liens (refer to local laws)

7. Bail bond liens

E. The effect of liens on title

1. Liens run with the land.

2. Liens attach to the property, not the property owner.

F. Priority of liens

1. The order in which claims against the property will be satisfied.

2. Generally, real estate taxes and special assessments take priority over all other liens.

3. Other liens follow in the order that they were recorded.

4. Some exceptions exist, particularly for mechanic's liens.

5. Subordination agreements between lien holders can change priority.

II. Real Estate Tax Liens

A. General ad valorem tax

1. They are levied by taxing bodies as a government power.

a. State

b. Cities, towns and villages

c. School Districts

d. Drainage districts

e. Water districts

f. Sanitary districts

g. Parks, forest preserve and recreation districts

2. They are levied according to the value of the property being taxed (ad valorem = to value).

3. Ad valorem are specific, involuntary, statutory liens.

4. Exemptions: properties used for tax-exempt purposes:

a. municipal buildings

b. various municipal organizations

c state and local governments

d hospitals

e educational institutions

5. The method of assessment varies among jurisdiction (for example, a property's market value, a percentage of market value or replacement cost).

6. Equalization process used to achieve uniformity

7. Arriving at the tax rates

a. A budget must be adopted by the taxing body.

b. The amount of tax money needed specifically from real estate is derived from the budget figures.

c. An appropriation is made, authorizing the expenditure of such funds and providing for their sources.

d. The tax levy is imposed on each parcel of real property.

e. The tax rate us computed for each property.

f. The tax bill is sent to each property owner.

8. Tax bills

a. Usually one tax bill incorporates all taxes levied by various taxing bodies.

b. For tax bodies operating on different budget years, separate tax bill sent.

c. Due date, called penalty date, set by statute.

d. Discounts offered to encourage prompt payment.

9. Enforcement of tax liens

a. The taxes must be valid to be enforceable

b. The provisions for delinquent taxes include

(1) Tax foreclosure

(2) Tax sale

(3) Penalties imposed when the delinquent taxes are paid

(4) The rights of redemption

(a) Equitable redemption

(b) Statutory redemption

B. Special Assessments (Improvement taxes)

1. Always specific and statutory liens.

a. Voluntary¾ the property owners in the area to be affected can petition for the improvement.

b. Involuntary¾ the appropriate governmental authority can initiate the procedure.

2. Costs are spread over the assessment roll properties.

a. On a fractional basis (equal costs)

b. On a front-footage basis (prorated costs)

3. The annual bills are typically spread out for a number of years, with the property owner having the right to prepay at any time without penalty.

 III. Other Liens on Real Property

A. Mortgage liens and Deed of Trusts - voluntary, specific liens used in real estate financing (see Chapters 14 and 15)

B. Mechanic's liens¾ involuntary, statutory, specific liens

1. Mechanic's liens give security to those who perform labor or furnish material in the improvement of real property.

2. There must be a contract (expressed or implied, but usually written) between the owner and the contractor.

3. Depending on the jurisdiction, lien priority can be established by

a. The date the construction began or materials were first furnished

b. The date the work was completed

c. The date the individual subcontractor's work was either commenced or completed

d. The date the contract was signed or work was ordered

e. The date a notice of the lien was recorded, filed, posted, or served

4. In some states may be given priority over previously recorded liens.

C. Judgment liens¾ involuntary, equitable, general liens

1. A judgment is a decree issued by a court at the end of a lawsuit.

2. A judgment lien takes its lien priority according to the laws of the state in which the property (real or personal) is located.

3. It is enforced through the issuance of a writ of execution and the ultimate sale of the property.

4. When property sold satisfaction of judgment should be filed.

5. Lis pendens ("litigation pending")¾ an encumbrance that is a notice of a possible future lien on real estate.

6. Attachments¾ the court retains custody of property until a lawsuit is concluded.

A. Estate and inheritance tax liens¾ involuntary, statutory, general liens (see Chapter 12); they are usually paid during the probate court proceedings.

B. Utility liens¾ involuntary, equitable, specific liens granted to municipalities to assure collection of the funds due them for utility services they have provided

C. Bail bond liens¾ voluntary, statutory, specific liens to assure the appearance of the defendant in a criminal action

D. Corporate franchise tax liens¾ involuntary, statutory, general liens corporation as a condition of their conducting business in some states

E. Internal Revenue Service (income) tax liens¾ involuntary, statutory, general liens as the result of a person's failure to pay any portion of his or her federal tax liability, such as income and withholding taxes

 

STATE AND LOCAL CONSIDERATIONS:

  1. What are the details regarding real estate tax liens in your area? How are the properties assessed; when are assessed valuation notices mailed; what are the appeals procedures; when are the tax bills or tax statements mailed; when are the taxes due?
  2. What are the procedures for special assessments in your area?
  3. What are the details regarding mechanic's liens in your area? Who can file them? Can a real estate agent file a mechanics lien in your state? At what time do they take their lien priority? What are the filing or recording periods? What additional activities are required to collect on them? What are the foreclosure procedures? What are the redemption procedures? What interest rates apply?
  4. What are the details regarding judgment liens in your area (confession of judgment and judgment suits)?
  5. What inheritance taxes are levied by your state or county?
  6. Are municipal utility liens allowed in your area? If so, what are they and what are the procedures for their becoming liens?

 

DISCUSSION QUESTIONS:

1. Who are the taxing authorities in your area?

2. How do tax rates vary from one area to another?

3. What special assessments have been levied in your area? Were they voluntary or involuntary and why?

 

CLASSROOM EXERCISES:

1. Obtain a preliminary title report (with names and other identifying information deleted) that illustrates the various types of liens. Show it to your class as lien priorities are discussed.

2. Secure a copy of your state's statutes as they relate to mechanic's liens and give your class time to look at the law.

3. Generate a "time line" for the assessing of property and the levying, due date, delinquency and foreclosure of real estate taxes. Have your students draw this time line on the board.

4. Using the case study property introduced in Chapter 6 have students calculate the annual taxes using tax rates from your local area.

 

INTERNET EXERCISE:

1. Have students go to the IRS site noted on page 150 of the text and ask them to retrieve IRS publications on moving expenses and tax consequences of selling a residence.

GUEST SPEAKER:

1. Arrange to have someone from the tax assessor's office speak with your class about the assessment and taxation procedures.