Liability For Real Estate Taxes After Foreclosure
If you plan to walk away from a house and let your mortgage lender foreclose, do you continue to pay property taxes? This is a question often asked by homeowners who own property worth less than the mortgage balance. People are concerned that they will remain personally liable for unpaid property taxes after the bank foreclosure.
The general legal rule is that taxes on real property are assessed only against the property itself and not the owner. Taxes on personal property are the owner's personal liability. Practically, if a property owner does not pay real estate taxes the government's remedy is to put a lien on the property and sell the tax certificate at public auction. The purchaser of the tax certificate at the tax auction pays the unpaid property taxes to purchase the certificate so that there is no longer any liability owed to the government. If a mortgage company takes back the property at foreclosure sale its title is subject to real estate tax liability. When the mortgage lender subsequently sells the property the purchaser of the property must pay all outstanding tax liability in order to get clear title.
For these reasons, I do not think a homeowner is personally liable to pay real estate taxes, and other attorneys have expressed similar views. I recommend to clients that they do not pay real estate taxes once they make the decision to permit their lender to foreclose. A lender offering a deed in lieu of foreclosure could demand that all taxes be paid as part of the negotiation.
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida
When the bank subsequently takes the property back they must settle all taxes owed to clear title.
Jonathan Christopher of Short Sale Way
Tax obligations fall to the title holder of record. Of far greater concern to a foreclosed party is the potential income tax liability looming in the year the foreclosure occurred. The Lender will fill a 1099-c showing the amount they charged off, which is considered by the IRS as a "forgiveness of debt" therefore fully taxable. If you were expecting a tax refund, the IRS can sieze it as well as freeze your bank accounts in their recovery attempts! Best to file the proper documents to avoid this tax liability as Washington allowed for 2008-2009 only.
Please tell me what you think we should do. We are going through a short sale on our property. We'd rather not pay property taxes. It looks like the sale will go through in the next few weeks, but we are willing to go into foreclosure if it falls through. We cannot afford our mortgage and had to move away from our home. Do you recommend we pay the property tax for the year? Our credit is already ruined due to defaulting on our mortgage. Is this something that can come back at us--with penalties and the law (CA) whereby we will be forced to pay all back taxes at some point? Or does it just reflect badly on our credit--which at this point doesn't matter.
if we buy a house at foreclosure auction will have to pay the outstanding property taxes in addition to the purchase price.