Do they just straight up foreclose on your house? Or does it just get tacked onto your outstanding IRS balance as just another form of debt?
Could anyone provide some insight on how the escalation ladder works with the government when you suddenly stop paying your property taxes (e.g. because you are unable to afford to?)
Property taxes are local not federal. You owe property taxes to the town, city, or county.
What happens when you are late paying depends on your jurisdiction. The local procedures define the steps and the timing.
Having a mortgage changes the issue. The investor wants to protect their investment. They won't let the local government auction the property. They will pay the back taxes and then foreclose. They would rather be in charge of the process; it makes it more likely they will not lose money. That is also why most lenders want to use an escrow account to pay the property tax.
Per your comment, this is one state's process. In Florida, property taxes are administered at the county level. While some money may go to the state or local jurisdictions, the county administers the collection of the property taxes.
Many jurisdictions sell tax liens and here in Florida this is what happens. So say a person owes 1K in property taxes, around June each county will hold an auction for tax liens. Investors "bid" on those liens, by saying what interest rate they are willing to accept with the lowest winning. Bidding 0% basically allows you to win the bid as no one can go lower. In Florida, two years of tax liens need to be sold prior to someone else attempting to take possession of the property.
The investor provides the lien amount to the county, so the county is out zero dollars other than the administration of the liens. However, most counties also add fees when the lien is to be cleared to cover that cost.
The property owner can attempt to clear the lien, by buying it back. He will have to pay the county, the original lien amount, a fee, and any interest owed.
But let's say that does not happen. Here I am a little fuzzy on the process but a person can then attempt to take control of the property. Priority may go to lien holders, but if they don't act, anyone can step up and do so. That person must clear all liens, including the tax liens, and any mortgages. Once they do so, they can own the property by some legal process.
Many pitch men sell "investment" advice for including tax liens in your portfolio. They make it sound like you will certainly get a high interest rate but may also end up with owning a home free and clear. "Send me 19.99 and I can help you build your real estate portfolio for little or no money".
Here are some drawbacks:
Some states, such as Oregon, have a way to apply for deferral of property taxes. Someone who qualifies can continue to live there and have their back taxes taken out of the estate when they die.
For Texas, the county tax appraisal district assesses the property taxes for all taxing entities (schools, cities, counties, utility and service districts), and after a property owner fails to pay taxes a tax lien is placed on the property. Depending on whether the property is in a city or not, residential or not, abandoned vs maintained, and vacant vs occupied, after three to five years the county or city can issue a tax warrant allowing the sheriff to seize the property. The sheriff can then sell the property in a monthly sheriff's sale with a minimum bid of the total of the tax warrant. However, the original owner has a right of redemption for 6 months for non-residential and 2 years for residential property, where they can pay the sheriff sale price plus interest and reclaim their property.
As a matter of practice, many appraisal districts will not seize residences with homestead exemptions, as they are not required to seize property after 5 years of delinquency. So, people without mortgages who are occupying and maintaining their residence may accumulate more than 5 years of back taxes and interest, and when the property is sold or transferred the tax lien is due.
In Iowa I think it works like this (read here):
Example 1: There is a $200,000 home with $5,000 in unpaid taxes. You scout the property and see that it is a well maintained home. Most likely someone simply forgot to pay their taxes or is having temporary financial trouble. You bid 25% at the auction and win and pay the county $5,000 immediately. Six months later the taxes and interest are paid to the county by the owner and you get a check from the county for $5,600 ($5,000 + 12% interest for 6 months).
Example 2: There is a home that sold for $100,000 last 5 years ago and has $5,000 in unpaid taxes. You scout the property and see that it is poorly maintained. The roof has holes in it and the paint is falling off. This could be an abandoned property. You weigh your options and decide it's worth it if you end up getting the property and bid 100%. Nobody bids lower than 100% but a few others also bid 100%, you win by random selection (?). You pay the $5,000 to the county immediately. After the allowed period the taxes have not been paid. You do x and y and get a tax deed to the property, foreclose, and are able to sell the property for $25,000. If you had bid a low 50% at the initial auction, you would get $12,500 of that and the rest would go to the owners or their creditors.
The main problem is when taxes are unpaid and you have to foreclose. There could be squatters. They may not have had insurance and the house may have burned down. It could be a business property with chemical contamination that makes it impossible to sell. If you bid less than 100% you have to go through all the trouble of forcing the auction of the house and only get part of the proceeds (the rest going to the owners or other lien holders). You could be out all of your money. If you do get that unicorn like the $200,000 house for $5,000 but they didn't pay their taxes and you start foreclosing, they may file a court case to stop it. Eventually you may win the court case or get the $5,000 and 24% APR from them, but it could be a real hassle.
So the nicer properties with lower unpaid taxes usually end up going for very low percents because they are safe and it's almost guaranteed the taxes will be paid and you will earn 24% APR on your money. You don't have to do anything after paying at the tax sale, you just get a check from the county when they are paid.
You may be wondering why the county offers these sales. I think a lot of it is PR. Sure they get their expected money up front. For people that eventually pay their back taxes it isn't much different though and they are missing out on that 2%. But if the taxes are never paid the elected officials don't want people screaming at them for foreclosing on some poor grandma's house. Once the tax sale happens the officials can wipe their hands of the situation. It's some mean investor trying to foreclose on that grandma's house, not your county clerk who needs to get elected again.
Property taxes are paid to your local authorities like the town or county you live in. So before anything, your local authorities will intervene. The typical chain of action is gradual actually. Let me explain the steps in simple terms.
Step 1: Late Fees & Penalties: First, you'll face late fees and penalties, increasing the outstanding amount. At this point, an automatic late fee is added to your outstanding tax amount.
Step 2: Liens and Notices: If you have not made the payment for the outstanding balance and late fee by the stipulated date provided, there will be a lien placed on your property. This basically means the government now has a legal claim on your property to recoup the debt. You'll also receive official notices urging payment.
Step 3: Foreclosure (Last Resort): If you persistently neglect these warnings and continue not paying, the property could eventually foreclose. This is a legal process where the government seizes and sells the property to settle the debt. However, these steps are taken gradually. The timeframe for escalation can vary depending on your location's specific laws.
Here's my advice if you or someone you know is unable to pay the property taxes:
Reach Out for Help: If you're struggling to pay, proactively contacting your local tax authority might be helpful. They might offer payment plans or hardship programs to assist you. Ignoring the issue will not make it go away. To avoid serious consequences, it's best to address it as soon as possible.
I hope this helps you. I suggest getting in touch with a real estate professional or real estate tax attorney who can advise the best way to resolve this in your specific situation. Good luck!
