The owner of a house is responsible for paying property taxes on it. That simple statement masks some complexity, though. When a house goes through foreclosure, its ownership passes through the homeowner, the lender and the purchaser of the home at the foreclosure sale. Different states have different rules, so it can be hard to predict what a bank will do without knowing a given state's laws (which means doing a search for foreclosure on Wikipedia won't get you the answer). Generally, back property taxes in foreclosure must be paid.
The specific rules regarding tax responsibility for foreclosed properties varies on a state-to-state basis. As a general rule, individuals should always research the status of back taxes on a foreclosed property.
Banks Must Pay Back Taxes
When a bank takes ownership of a property, such as when it buys a property at a sheriff's sale or foreclosure auction, it takes liability for all of the responsibilities of ownership. These include paying property taxes. As such, once the bank takes title, it'll become the owner of record for the property and will be responsible for all property taxes that were past due at the time of the sheriff sale.
Foreclosure Tax Liability
Taxes are generally the most senior lien against a property's title. Once property taxes come due, there's essentially nothing that can be done to remove them, other than paying them. With this in mind, if a lender plans to allow the property to sell at a sheriff's sale, it's entirely possible that it could pay the past due taxes off to clear the title of the property.
Previous Owner Liability
If the bank doesn't clear the title by paying the taxes, the previous owner of the home could end up liable for the taxes, depending on where the house is located. In some states, property taxes are assessed solely against the property, and if the owner doesn't pay them, his liability is limited to losing the property. Other states, though, consider property taxes to be a personal debt. If an owner lives in one of those states, he could be liable for the taxes for up to 15 years.
Private Purchasers at Sheriff Sale
When a private party buys the property at sheriff sale, the bank may not be responsible for paying the taxes depending upon the state law. Frequently, owners buy properties at foreclosure sales without title insurance. Purchasing without title insurance and without a title report can leave that new owner liable for taxes that she didn't even know existed. Furthermore, since many of these sales are "as is," there isn't any liability on the part of the foreclosing lender.
The Bottom Line
The bottom line is that the rules are different based on where you're located. You can be relatively sure that the lender paid the taxes for the time that it actually owned the property, if at all. However, the only way to be sure of anything else is to check the title of the property and confirm that any back taxes are paid. If you're an owner of a foreclosed property, it's wise to talk to an attorney and find out if your liability for the taxes will get cleared out by the foreclosure process.
- Realty Now: Buying Foreclosed Homes - Tax Issues to Consider
- Foreclosure - Wikipedia
- U.S. Census Bureau. "Local Governments in Northeast More Reliant on Property Taxes than South and West." Accessed Nov. 26, 2019.
- Organisation for Economic Co-operation and Development. "Tax on Property." Accessed Nov. 26, 2019.
- Internal Revenue Service. "1.14.4 Personal Property Management." Accessed Nov. 26, 2019.
- Tax Foundation. "States Should Continue to Reform Taxes on Tangible Personal Property." Accessed Dec. 18, 2019.
- Tax Foundation. "Testimony before the House Ways and Means Select Revenue Measures Subcommittee." Accessed Dec. 18, 2019.
- Internal Revenue Service. "With New SALT Limit, IRS Explains Tax Treatment of State and Local Tax Refunds." Accessed Dec. 18, 2019.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.