What is a State Tax Lien? - Definition & Removal

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

A state tax lien can be a significant problem for property owners. Let's take a look at what a tax lien is and how the owner can get it removed from the property title and personal credit report.

State Tax Liens

Jane is getting ready to sell her home, but before it goes on the market, she gets a distressing call from her agent, Mary. It turns out the state has placed a lien against the house, and unless it is taken care of, Jane won't be able to legally sell it. Fortunately, Mary has dealt with this before and is ready to help explain what a tax lien is and how to get it removed from the property.

Definition

A state tax lien is a tool used by the state government to force a person to pay unpaid back taxes. The government can place a lien on property when the owner fails to pay income or property taxes. The lien is a legal claim against property such as real estate, vehicles, or even bank or investment accounts that gives the state priority over any other creditors such as the mortgage holder. Since real estate and vehicles are registered with the state for tax purposes, these are the assets that typically have liens applied. Jane hasn't paid her state income taxes for the last two years, and since the government already knows she owns the house, it is a simple matter to make a legal claim against it.

Aside from tying up the sale, the lien can negatively affect Jane's credit score because a lien is a public record which gets reported to the credit rating bureaus. The drop in score and presence of a lien on the credit report will make it more difficult for Jane to borrow money for some time.

Removal Process

Fortunately, there is a process to get the lien removed from the property and Jane's credit report. The first step is to get a copy of her credit report and see what the report says about the lien balance. Then she will want to contact the state tax department and confirm the outstanding balance. This is very important because the bill must be paid off completely in order for the lien to be removed from the property.

The debt must be paid in full with a lump-sum payment or through a repayment plan. It is possible to get a lien removed through bankruptcy or settle with the taxing authority for a lesser amount, but this will result in an even worse damage to Jane's credit rating.

The worst option from a credit rating perspective would be to get it discharged through bankruptcy, but that would absolutely destroy Jane's credit. Before any payment is made she will absolutely want to get an agreement on payment in writing. She will also want to keep receipts and copies of the checks in order to prove she paid, in case there is a mixup in the future.

Turns out Jane owes a total of $4,000 in back taxes. Annoying as that is, she has the cash to pay. She goes through the above steps and the lien is lifted from the property. She's now free to proceed with the sale of the house, but what about her credit report?

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