In a foreclosure, the property is eventually given over to the bank because of an unpaid mortgage debt. The foreclosure process can take months, during which the house is in limbo, still technically owned by the borrower but soon to be either sold at auction or owned by the bank. This makes it difficult for borrowers and buyers alike to be sure who pays the property taxes due on a foreclosure. Several different factors apply to this tax dilemma.
Property Tax Payment
Generally, the lender will pay the property taxes due on the foreclosure when the sale is completed and the borrower has left the house. This occurs because the bank has either overseen the sale of the house through the auction or now owns the house outright, making the bank responsible for the property taxes. Homeowners are typically able to walk away from a property completely after a foreclosure, with no remaining liabilities including property taxes.
In some cases, the lender will demand property tax payment from the borrower. This typically occurs if the borrower has stopped paying both property taxes and mortgage payments. The government and the lender will both use their liens against the property to try and claim it. Government liens always have the highest priority, so the government will be able to win the house in court. To solve this issue, lenders may require the borrower to pay all taxes during a foreclosure if the government has already filed a lien against the property.
Short sales are similar to foreclosures but are more of a compromise between the borrower and lender. In a short sale, the borrower sells the house on the market and uses the proceeds to pay off the lender. The details vary according to the agreement between the borrower and lender, but the lender tends to assume responsibility for the property taxes. The short sale puts the primary burden of sale management on the lender, and with the vested interested comes an agreement to handle the property taxes if there is doubt on who owes them.
Buying a Foreclosure
Buyers of a foreclosure may also worry that they may be responsible for part of the property taxes involved in the sale of the foreclosure. If the buyer purchases the house in the middle of the year, the buyer may wonder if he must pay property taxes for that entire year. In these cases, lenders also tend to take care of taxes. For most sales agreements, lenders will even pay for all the taxes on a house for the remaining year to make the purchase more simple, giving the buyer a break until the next tax season.