Local governments depend on real estate tax revenues to pay for schools and county services. County governments do not collect income taxes, and sales tax revenues tend to be unsteady. Real estate tax revenue is stable and it is the lifeblood of school districts and county government in Nebraska.
So when a property owner fails to pay their tax, the County Treasurer sells Tax Certificates to investors for the unpaid taxes. Investors receive 14% interest on the tax lien certificates. If the property owner does not pay the tax and associated interest within 3 years, the investor may take ownership of the property by applying for a Treasurer’s Tax Deed or, in the alternative, the investor may file a lawsuit to foreclose its lien.
TAX DEEDS CONVEY TITLE FREE AND CLEAR OF LIENS
Until a few years ago it was commonly believed that an investor who obtained title through a Tax Deed received the property subject to the mortgages and liens of record. However, in a series of mind-blowing opinions, the Nebraska courts have ruled that recipients of a Tax Deed acquire title FREE AND CLEAR OF LIENS!
These opinions came as a complete surprise to most attorneys in Nebraska, including attorneys specializing in real estate law. From an investment point of view, this is amazing. The purchase of a single tax certificate of $3,000 could yield an investor ownership of a home worth $100,000 free and clear of liens if the homeowner fails to redeem the certificate within the required time. One tax certificate investor shared with me that he acquires title in about one-third of his investments.
ALWAYS PAY THE OLDEST TAX YEAR FIRST
If you owe delinquent property taxes, remember that you have 3 years to redeem the tax certificate before an investor may apply for a Tax Deed. For this reason, you always want to pay the oldest tax year first.
PAYING REAL ESTATE TAXES OUTSIDE OF BANKRUPTCY
The county treasurer will not accept monthly payments on delinquent taxes. The entire tax year must be paid in one payment. You do have the right to pay one year at a time.
PAYING PAST DUE REAL ESTATE TAXES IN BANKRUPTCY
Chapter 13 bankruptcy plans allow a homeowner to pay delinquent real estate taxes over a 3 to 5 year monthly payment. Once a Chapter 13 case is filed, all foreclosure activity must stop, including actions taken by a tax certificate holder. This is a key advantage to paying taxes through a Chapter 13 Plan. The bankruptcy court forces the county treasurer to accept small monthly payments instead of requiring an entire year of taxes to be paid at once.
RECOVERING A HOME LOST TO UNPAID REAL ESTATE TAXES
May a homeowner recover a home after a Tax Deed has been filed? There are several cases in bankruptcy courts allowing a homeowner to recovery a home lost to a tax deed, but there are no opinions in Nebraska yet. See this article. However, it appears that a homeowner may be successful in such an action if they file Chapter 13 and ask the court to set aside the sale within 2 years.
Image courtesy of Flickr and JacobRuff.