What happens if you don’t pay your property taxes?

Receiving a notice from the county tax collector that your home is being sold because you are behind in property tax payments can be scary.  This article will help you through understanding everything there is to know about your property taxes and your home possibly being sold at a tax sale auction.

What are property taxes?

Property taxes are an ad valorem tax based on the assessed value of real estate multiplied by a specified tax rate.  They can be taxes on land, buildings and other forms of property and paid by the property owner.  These taxes are collected by local governments.  Then the monies are shared with the local governments and the state to pay for roads, schools and other government projects.

If you have never owned a home before, you may be unfamiliar with property taxes.  However, homeowners quickly learn that property taxes are a significant expense of owning a home.  In the United States, the median property tax bill is $2,350 per year.  In California, the median property tax bill is $3,550 per year, roughly 30% higher than the national number.

Did you know that your property tax amount can be challenged in some situations?  For more information, read How property taxes are calculated and how you can challenge your County appraisers value.

Do you still pay property tax after your house is paid off?

If you have paid off your home, you may be wondering if you still need to pay property taxes?  In short, the answer is yes.  Previously, your monthly mortgage payment may have had your property taxes impounded.  For example, your lender may have collected extra amount with your mortgage payment.  Your lender then used that amount to pay your property taxes.  Impounding is like a monthly savings program to pay for your property taxes.  However, if you have paid off your home, you are responsible for making your property tax payments on time.

When are property taxes due?

Property tax bills may come either annually, semi annually or in smaller installments.  Property taxes are paid bi annually in California.  Some states have grace periods, but in California there is no grace period.  Property taxes are delinquent if not paid by December 10 and April 10.  The good news is that most county offices now allow you to pay your property taxes online.  Simply go to your local county’s website and search for “property tax” or “tax collector”.  Here’s a complete list of California county tax collector offices.

What happens if you don’t pay your property taxes?

There can be serious consequences if you don’t pay your property taxes.  First, the penalties for late payment can be quite steep.  In California, the penalty for late payment of your property taxes is 10%  of the amount due.  Each successive missed payment penalty is added to the previous amount.  If left unpaid, there is an additional 10% penalty every six months for any unpaid penalties and amounts.  To make matters worse, payments apply toward penalties first, and then your property tax amount.

Property tax sales

If your property taxes are not eventually paid, your home may be sold at a tax sale auction.  At the auction, the county tax collector will auction off your property to the highest bidder, with the bid normally opening at what is owed in back taxes.  The winning bidder becomes the new legal owner of the property.  Different states may have different amounts of time before a property can be sold at auction.

In California, if you have an outstanding balance for five years or more, the county can hold a tax sale auction and sell your home to the highest bidder.  These tax sales typically are listed on your county’s website and happen once or twice a year.

How to stop a property tax sale in California

In California, to prevent your home from being sold at a property tax sale, all outstanding amounts owed must be paid by 5:00 pm the business day before the scheduled tax sale.  Penalties are paid first, and then whatever taxes are owed.

Tax lien sales

In some states, a tax lien rather than the home is sold at auction.  Unlike a tax sale where the buyer bids on what they are willing to pay for the property, a tax lien buyer bids on what interest rate they are willing to accept to pay the taxes off and receive lien payments instead.  The bidder willing to accept the lowest interest rate, wins the bid. The tax lien buyer pays the taxes owed, and receives a tax lien that is placed against the owner’s home.

With a tax lien, the homeowner becomes responsible for paying the buyer of the tax deed the amount owed plus interest.  These tax deeds come at a hefty interest charge, typically between 10-12%, but can be as much as 30% in some cases.  Investors and hedge funds buy up tax deeds because of the high profit returns.   Buying tax liens is a big business and in 2017, roughly $4 billion dollars in tax liens were purchased by private investors according to Jim Westover of the National Tax Lien Association.

Don’t assume you can continue to not pay your property lien just because you live in a tax lien state.  If the tax lien along with any interest is not paid back within a prescribed time frame, the owner of the tax lien may foreclose upon your home.  Typically you have one to three years to pay back the investor before they can foreclose on your home.

Tax lien states

The following states are tax lien states:  Alabama, Arizona, Colorado, Florida, Illinois, Indiana, Iowa, Kentucky, Maryland, Mississippi, Missouri, Montana, Nebraska, New Jersey, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Vermont, West Virginia, and Wyoming.

Can I redeem my house after a property tax sale?

In California, you cannot redeem your home after the tax sale.  In tax lien states, you can redeem your house by paying the buyer of the tax lien all amounts due within six months to four years.  You can see a complete list of redemption periods and interest rates here.

Consequences of not paying your property taxes

Bank may foreclose

If you have a bank loan on your home, your lender has a vested interest in making sure you pay your property taxes.  In most states, if your home is foreclosed at a tax sale, your lender’s loan may be wiped out.  Because of this, your mortgage gives your lender the right to foreclose before the tax sale to protect their interest.  Even if your home doesn’t go to tax sale, it may go to foreclosure auction, though this is rare.

Bank may impose escrow impounds

Your lender may also insist on collecting an additional amount each month to pay for your property taxes.  This amount, called an impound account, is kept in a reserve account specifically for paying your property taxes and homeowners insurance each year when they are due.  The benefit of an impound account is that you don’t have to remember to save up for a large property tax bill each year, as the bank is doing that for you.

Bank may pay taxes, but add the costs to your mortgage

Alternatively, what often happens is your lender will pay the defaulted property taxes.  Lenders are usually notified of upcoming tax auctions by the County if they have a loan on a property.  If the taxes are not paid, your lender may pay the defaulted amount at the last minute, to prevent their loan security wiped out.  If your lender does this, then they will add whatever amount you owed, plus penalties to your existing loan amount.  As a result, you will end up paying interest on your property taxes over the life of the loan.

If you don’t have a mortgage and there’s no lender to pay the taxes, or if your bank fails to pay the property taxes, it may still go to tax sale.

Can someone take your house by paying your property taxes?

There’s a common notion that if you pay someone’s property taxes each year for a specified number of years, that you will own their property.  This is known as “adverse possession” or “squatters rights”.   While this is possible, the law does not make it easy and there are different rules in different states.

First, the property taxes must be delinquent.  Second, in California, the squatter must visibly, continuously and openly live in the home.  While in possession they must treat it as though it were their own home.  The key is that it cannot be done in secret or in such a way that the real owner would not know the squatter had moved in.  The length of time varies in different states.  In California, it must be for a period of five or more years.   In Florida, the time frame is seven years.  But in Texas, the time frame can be as long as ten years.

Additionally, adverse possession usually requires going before a judge and proving all of the above conditions were met in a quiet title action.  Whether you are the original landowner trying to keep your property, or the squatter, the court costs can be significant.

California tax auction notification process

In California, the County Tax Collector must notify a delinquent homeowner that their home is going to tax auction by certified mail. This notice must be at least 45 days in advance of the sale, but no more than 120 days.  In addition, the County must post notice in a public newspaper.  If no newspaper is available, it must be published in at least three public locations.

Simultaneously, most California counties post a list of Assessor Parcel Numbers (APNs) on their County website showing which parcels are up for auction and how much is owed in taxes.

What if I cannot pay my property taxes?

If you cannot pay your property taxes, don’t panic.  There is help for people who are unable to pay their property taxes.  However, you should also not ignore your situation.  There are solutions, but the longer you wait, your options will become less and less agreeable.  You may need to sell your home to an investor or cash buyer.

Property Tax Postponement Program

In California, you may be able to take advantage of the state’s Property Tax Postponement Program.  To qualify, you must have a household income of less than $35,000 a year.  In addition, you must be at least 62, blind or disabled AND have at least 40% equity in your home.

It’s not a tax forgiveness program, simply a postponement.  The state charges 7% interest, which is pretty steep.  The postponed taxes and interest must be repaid when the property is sold, changes ownership or the owner dies.  The good news is that it allows the homeowner to postpone their property taxes indefinitely, and according to California Legislative Office, are less costly than reverse mortgages.

You may be entitled to excess proceeds from the sale

You may be entitled to excess proceeds from the sale.  After the county’s taxes, fees and penalties are paid, any mortgages and recorded lien holders are also paid.  Lastly, those who hold legal title to the home at the time of sale, receive any left over proceeds.  In order to receive these funds, you must file a claim with your county tax collector within one year of the sale.  This is good news, but it could be better.

While you may receive some money from the tax sale, your lender’s and tax collector’s penalties can add up.  This can leave you with less than you might have received had you simply sold your home before the tax sale.  Furthermore, buyers at property tax sales, are looking to buy homes at significant discounts, and hoping to only pay the defaulted tax amount.  That may leave you without any chance of excess proceeds.

What do I do if I’m out of options?

If you cannot afford to pay your property taxes, your best solution may be to sell your home.  If it’s still a few months away to the tax sale, and your home is in good condition, you should consider selling through a real estate agent.  A good Realtor^® can market your home and get you the highest and best price for your home.

On the other hand, if you’ve run out of time, or your home has significant deferred maintenance and needs repairs, selling to a cash buyer or investor may be a better option.  Cash buyers are able to close quickly and therefore prevent your home from going to tax sale.  The benefit to you is you have a chance to keep more of your equity.