MODULE 8-2: REAL ESTATE TAX LIENS

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1 MODULE 8-2: REAL ESTATE TAX LIENS LEARNING OBJECTIVES When you have finished reading this chapter in your text, you should be able to: Identify the various classifications of liens. Describe how real estate taxes are applied through assessments, tax liens, and the use of equalization ratios. Explain how non-tax liens, such as mechanic s liens, mortgage liens, and judgment liens are applied and enforced. Distinguish the characteristics of voluntary, involuntary, statutory, and equitable liens. KEY TERMS Ad valorem tax A tax levied according to value; usually refers to general real estate taxes; also called a general tax. Assessment The imposition of a tax, charge, or levy, usually according to established rates. Assessment roll Spreading an assessment over the various parcels of real estate that are within a taxing body's jurisdiction. Attachment The act of taking a person's property into legal custody by writ or other judicial order to hold it available for application to that person's debt to a creditor. Encumbrance Anything (such as a mortgage, tax, or judgment lien, an easement, a restriction on the use of the land, or an outstanding dower right) that may diminish the value or use and enjoyment of a property. Equalization factor The figure set by local taxing bodies whereby assessed values of property for tax purposes in a particular county or taxing district may be raised or lowered to make them equal to assessments in other counties or districts. Equitable lien A lien imposed on property that arises out of common law and that may be created by a court when justice and fairness require it. For example, a judgment against the property's owner may result in a lien on the property. (Contrast with statutory lien.) Estate taxes Federal taxes on deceased persons' real and personal property, levied when such property passes to deceased persons' heirs. General lien The lien right of a creditor that attaches to all of a debtor's property, both real and personal. General real estate tax A tax that is made up of the taxes levied on the real estate by government agencies and municipalities. Prelicensing Course - Student Module 8-2, Page 127

2 Inheritance taxes State taxes on deceased persons' real and personal property, levied when such property passes to deceased persons' heirs. Involuntary lien A lien that is imposed on property without the owner's permission, such as those instituted by court order or tax liens. (Contrast with voluntary lien.) Judgment The formal decision of a court upon the respective rights and claims of the parties to an action or suit. After a judgment has been entered and recorded with the county recorder, it usually becomes a general lien on the property of the defendant. Judgment lien Lien placed after the formal decision of a court upon the respective rights and claims of the parties to an action or suit. Lien A right given by law to certain creditors to have their debt paid out of the property of a defaulting debtor, usually by means of a court sale. Lis pendens A recorded legal document giving constructive notice that an action affecting a particular property has been filed in either a state or a federal court. Local Improvement District An assessment (i.e., tax) on a local improvement district for a public improvement project the district has approved. Mechanic's lien A statutory lien created in favor of contractors, material suppliers and laborers who have performed work or furnished materials in the erection or repair of a building. Mill One-tenth of one cent; used by some states to compute real estate taxes. Mortgage lien A lien on real estate created by a mortgage borrower as security for payment of the debt. Redemption The buying back of real estate sold at either a foreclosure or tax sale; the owner of the property enjoys the right of redemption. Special assessment A tax or levy customarily imposed against only those specific parcels of real estate that will benefit from a proposed public improvement, such as a street or sewer. Specific lien A lien affecting or attaching only to a certain, specific parcel of land or piece of property. Statutory lien A lien imposed on property by statute a tax lien, for example. (Contrast with equitable lien.) Subordination agreement Written agreements between lien holders to change the priority of mortgage, judgment and other liens under certain circumstances. Prelicensing Course - Student Module 8-2, Page 128

3 Tax lien A statutory lien imposed against property to force payment of general taxes and assessments. Tax liens take priority over all other liens. Tax sale A court-ordered sale of real property to satisfy payment of delinquent taxes. Trending-- Annual adjustment to AV based on market activity. Vendor s lien A lien that belongs to a vendor for the unpaid purchase price of land, where the vendor has not taken any other lien or security beyond the personal obligation of the purchaser. Voluntary lien A lien placed on property with the knowledge and consent of the property owner. A lien, such as a mortgage lien, originated voluntarily by the owner of the property. (Contrast with involuntary lien.) ADDITIONAL TERMS Bail bond A voluntary specific lien placed against a parcel of real estate to serve as security for a court appearance. Corporation franchise tax A tax on corporations levied by the states as a condition of allowing them to do business in the states. Internal Revenue Service tax lien A lien imposed on property by the Internal Revenue Service resulting from a person's failure to pay any portion of his/her federal income taxes. Priority The order of position or time; the priority of liens is generally determined by the chronological order in which the lien documents are recorded, with the exception of property tax liens, which have priority even over previously recorded liens; and with the exception of mechanics' liens which can take priority as of the contract date. Redemption period A period of time set by state law during which a property owner has the right to redeem his or her real estate from a tax or foreclosure sale by paying the debt plus interest and costs. Surety bail bond An agreement by an insurance or bonding company to be responsible for certain possible defaults, debts or obligations contracted for by an injured party; in essence, a policy insuring one's personal and/or financial integrity. Tax foreclosure A legal procedure whereby the court orders real property sold to satisfy unpaid general real estate and special assessment taxes. Prelicensing Course - Student Module 8-2, Page 129

4 LECTURE OUTLINE I. Lien - A charge or claim against property made to enforce the payment of money. II. A. Encumbrance Any charge or claim that burdens the title to real property, including liens and non-monetary claims; lessens the value or impairs the use of the real property. Liens may be voluntary or involuntary, statutory or equitable, general or specific. B. General liens 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 and recorded. 7. A lien does not attach to personal property until that property is seized. C. Specific liens 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. 8. Vendor s liens. D. The effect of liens on title: 1. Liens run with the land. 2. Liens attach to the property, not the property owner. E. 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. Subordination agreements between lien holders can change priority. Real Estate Tax Liens A. General real estate or ad valorem tax 1. They are levied by taxing bodies as a government power. a. States and counties. b. Cities, towns, boroughs, 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 = according to value). Prelicensing Course - Student Module 8-2, Page 130

5 3. Ad valorem are specific, involuntary, statutory liens. 4. Exemptions: properties used for tax-exempt purposes: a. Cities, b. Various municipal organizations, c. State and local governments, d. Religious and charitable organizations, e. Hospitals, f. Educational institutions. 5. The method of assessment varies among jurisdictions (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 for each taxing body is computed separately. 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. Tax bodies operating on different budget years, separate tax bills are sent. c. Due date, called penalty date, is set by statute. d. Discounts are offered to encourage prompt payment. 9. Enforcement of tax liens e. The taxes must be valid to be enforceable. f. The provisions for delinquent taxes include: (1) published notice after a court has rendered a judgment. (2) tax sale. (3) penalties collected when the delinquent taxes are paid. (4) the rights of redemption (a) equitable right of redemption, (b) statutory right of redemption. B. Special assessments (improvement taxes) 1. Always specific and statutory liens a. Voluntary The property owners in the area to be affected can petition for the improvement. b. Involuntary The appropriate governmental authority can initiate the procedure. 2. Costs are spread over the assessment roll properties: a. on a fractional basis (equal costs), or 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. 4. Some states allow homeowners to pay lower taxes than owners of other types of real estate and/or may subsidize low-income homeowners tax bills. Prelicensing Course - Student Module 8-2, Page 131

6 III. Other Liens on Real Property A. Mortgage liens and deed of trust liens Voluntary, equitable, specific liens used in real estate financing. B. Mechanic's liens 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, or e. the date a notice of the lien was recorded, filed, posted, or served. 4. In some states it may be given priority over previously recorded liens, except for real estate taxes and special assessments. C. Judgment liens Involuntary, equitable, general liens 5. A judgment is a decree issued by a court. 6. A judgment lien takes its lien priority according to the laws of the state in which the property (real or personal) is located. 7. It is enforced through the issuance of a writ of execution and the ultimate sale of the property. 8. When property is sold, a satisfaction of judgment should be filed. 9. Lis pendens (litigation pending) is an encumbrance that is a notice of a possible future lien on real estate. 10. Attachments the court retains custody of property until a lawsuit is concluded. D. Estate and inheritance tax liens involuntary, statutory, general liens; they are usually paid during the probate court proceedings. E. Utility liens involuntary, equitable, specific liens granted to municipalities to assure collection of the funds due them for utility services they have provided. F. Bail bond liens voluntary, statutory, specific liens to assure the appearance of the defendant in a criminal action. G. Corporate franchise tax liens involuntary, statutory, general liens for taxes imposed on corporations as a condition of their conducting business in some states. H. Internal Revenue Service (income) tax liens involuntary, statutory, general liens that result from a person's failure to pay any portion of his or her federal tax liability, such as income and withholding taxes. Prelicensing Course - Student Module 8-2, Page 132

7 REVIEW QUESTIONS 1. When properly recorded in the county where the real estate of the defendant is located, a judgment becomes a(n): a. voluntary lien. b. involuntary lien. c. specific lien. d. statutory lien. 2. When a company furnishes materials for the construction of a house and is subsequently not paid, it may file a(n): a. deficiency judgment. b. lis pendens. c. estoppel certificate. d. mechanic's lien. 3. Which of the following liens does NOT need to be recorded to be valid? a. Mortgage lien b. Real estate tax lien c. Judgment lien d. Mechanic's lien 4. When a lien against a parcel of real estate may result from a lawsuit currently before the court, one examining the public records would look for: a. the chain of title. b. a lis pendens. c. a suit to quiet title. d. a judgment lien. 5. A mechanic's lien would be properly classified as a(n): a. equitable lien. b. voluntary lien. c. general lien. d. statutory lien. 6. The current market value of a property is $35,000. For tax purposes, it is assessed at 40 percent of market value. The tax rate of $4 per $100 of assessed value. What is the amount of the tax due? a. $560 b. $625 c. $705 d. $ Under which of the following types of liens can both the real property and the personal property of the debtor be sold to pay the debt? a. Real estate tax lien b. Mechanic's lien c. Judgment lien d. Assessment lien 8. Which of the following is a voluntary lien? a. Mortgage lien b. Estate tax lien c. Real estate tax lien d. Judgment lien 9. Mechanic's liens are based on a. federal law. b. state law. c. common law. d. case law. 10. A court orders real estate to be sold to satisfy an unpaid lien in an action known as a(n): a. encumbrance. b. attachment. c. seizure. d. foreclosure. Prelicensing Course - Student Module 8-2, Page 133

8 11. A mechanic's lien can be filed against an owner's real estate by a(n): a. real estate salesperson claiming part of the broker's commission. b. lumber company furnishing materials ordered by the property owner. c. real estate broker claiming a commission under a rejected offer. d. individual who obtained a judgment against the property owner. 12. The current market value of a property is $255,000 and it is assessed at 35 percent of its current market value with an equalization factor of What is the amount of real estate tax due if the tax rate is $3.50 per $100 of assessed value? a. $2, b. $3, c. $3, d. $4, Judgment liens are a. specific liens. b. voluntary liens. c. statutory liens. d. equitable liens. 14. A property owner contracted to have a swimming pool installed on her property. When the pool was completed, she refused to pay for the improvement, and the contractor filed a lien for nonpayment. This lien was most likely a: a. general lien. b. special lien. c. specific lien. d. voluntary lien. 15. G has defaulted in the payment of several of his debts, and the court has ordered his property sold to satisfy them. A title search revealed several outstanding liens against the property. Which of the following liens has first priority? a. The outstanding first mortgage lien dated and recorded one year ago b. The current year's real estate tax lien c. The judgment lien rendered and recorded last month d. The mechanic's lien for work started two months before the mortgage was recorded 16. After real estate has been sold by the state or county to satisfy a delinquent tax lien, the defaulted owner usually has a right to: a. have the sale canceled by paying the back taxes and penalties. b. pay his or her creditors directly and have their liens removed. c. redeem the property within the time specified by law. d. record a notice of nonresponsibility for the unpaid taxes. 17. Normally, the priority of general liens is determined by: a. the order in which they are filed or recorded. b. the order in which the cause of action arose. c. the size of the claim. d. the court. Prelicensing Course - Student Module 8-2, Page 134

9 18. Which of the following is NOT a specific lien? a. Real estate taxes b. Judgments c. Mortgages d. Mechanic's liens 19. Which of the following is a lien on real estate? a. An easement b. A recorded mortgage c. An encroachment d. A restrictive covenant 20. When establishing priorities for liens: a. a mechanic's lien is always first in priority. b. the date on which the lien was recorded determines priority. c. the date on which the debt was incurred determines priority. d. a broker's lien is automatically first in priority. 21. The current value of a property is $40,000. The property is assessed at 40% of its current value, with an equalization factor of 1.5 applied to the assessed value. If the tax rate is $4 per $100 of assessed value, what is the amount of tax due on the property? a. $640 b. $960 c. $1,600 d. $2, What is the difference between a general and a specific lien? a. A general lien cannot be enforced in court, while a specific lien can be enforced. b. A specific lien is held by one person, while a general lien is held by at least two persons. c. A general lien covers all of the debtor's property, while a specific lien covers only a certain piece of real property. d. A specific lien covers real estate, while a general lien covers personal property. 23. If the market value of a property is $84,500 and the assessment ratio is 35%, what are the monthly taxes if the tax rate is 30 mills? a. $ b. $ c. $73.94 d. $ Taxes levied on a property owner to pay to install sidewalks or sewers are called: a. ad valorem taxes. b. general property taxes. c. special excise taxes. d. special assessments. 25. Debts that are incurred by an individual and become liens against the real property owned by that person are: a. general liens. b. specific liens. c. fiduciary encumbrances. d. special assessments. 26. The real estate taxes are $1200 a year. If the assessment rate is 20% Prelicensing Course - Student Module 8-2, Page 135

10 and the tax rate is 120 mills, what is the current value of the property? a. $120,000 b. $80,000 c. $250,000 d. $50, The monthly taxes on a property are $200. If the tax rate is $4 per $100 of assessed value, what is the assessed value? a. $12,000 b. $90,000 c. $60,000 d. $240,000 Prelicensing Course - Student Module 8-2, Page 136