Property Tax Forfeiture

What is Property Tax Forfeiture?

Property tax forfeiture is a process where the state takes ownership of real property if property taxes are not paid.  When property taxes are not paid in the year due, the taxes become delinquent as of January 1 of the following year.  Those holding liens on the property are usually not provided with notice of the property's delinquent taxes at this time.  If the property owner does not contest the delinquent taxes, the district court automatically enters a judgment for forfeiture against the property in May following the delinquent tax year.  

After judgment is entered against the property, the redemption period commences.  Depending on the use, location, and ownership of the property, the redemption period is either one, three, or five years from the date of entry of the judgment.  During this redemption period, the owner or anyone having an interest in the property (i.e. a lienholder) can pay the delinquent taxes to avoid tax forfeiture.  

If the delinquent taxes remain unpaid at the expiration of the redemption period, the property is automatically forfeited to the state where it held by the state in trust for the local taxing districts.  The owner may have to option to repurchase the property from the county or the county can sell the property at a public or private auction.  However, the owner and lienholders are not entitled to any of the proceeds from the sale.  

How are Mortgages affected by the Property Tax Forfeiture Process?

When a property secured by a mortgage is subsequently forfeited for delinquent property taxes, it is very likely that the mortgage is extinguished.  When the mortgage was duly recorded or filed in the county records, and the certificate of expiration of redemption was served upon the mortgagee, the mortgage would be cancelled by operation of the tax forfeiture.  As such, it is pertinent that lenders understand the property tax forfeiture process and annually check whether the mortgaged properties are in danger of property forfeiture.

Unfortunately, a lender cannot pay only the delinquent year's property taxes to avoid forfeiture.  The county applies any money it receives first to the latest delinquent year and then to each subsequent year.  Thus, all delinquent taxes would need to be paid to avoid any forfeiture.    

What can lenders do to protect themselves?

There are several preemptive steps lenders can take to protect themselves from losing their interest in a property due to tax forfeiture.  First, the mortgage should contain provisions that all amounts paid by the lender to protect its interests, including payment of property taxes, shall be added to the indebtedness secured by the mortgage.

Second, lenders may file their names and current mailing addresses with the county auditor in the county where the land is located to receive notice of delinquent property taxes.  The filing fee is $15, and it must be renewed every three years.  

Finally, lenders can also require that property taxes be included in the mortgage payments and then pay the taxes themselves.  With this option, payments for taxes will be escrowed with the lender, and the lender will be in control of when the property taxes will be paid. 

Because the property tax forfeiture process can happen quickly in certain circumstances, lenders should take efforts to remain informed on the tax status of the properties securing their mortgages.  Adhering to any or all of these protection methods will allow the lender to be proactive rather than reactive when it comes to property tax forfeiture.