Governments, just like businesses need money to operate. They have overhead expenses like payroll and rent, but they also need money to pay for public services that they offer. Taxes, of course, are one of the primary sources of all governments’ income, and there are two taxes that are especially crucial to governments’ bottom line: income tax and property tax. Texas, of course, has no state income tax, so the latter tax is of special interest to us here.
Property taxes are assessed by local governments, typically at the county level, on the value of real property and certain items of large tangible personal property located within that county. Thus, if a person lives in Austin and therefore owns land, a home, and an automobile in Travis County, keeps a boat on Lake Amistad in Val Verde County, and owns a rental property in Dallas, that person would owe property tax to three different counties based on the location of each asset. The revenue from those property taxes is then used to fund a variety of expenditures such as public schools, libraries, and public transportation.
When a property owner fails to pay his or her property tax, the government may place a tax lien on the property. A tax lien, essentially, is an interest in the property that vests the government with certain rights with respect to that property. While a tax lien is not quite an ownership interest in the property in that tax liens typically do not give the government an absolute right to dictate how a piece of property should be used, tax liens nevertheless are a serious burden.
The most consequential right that a tax lien provides to the government is the right to foreclose on the property. This means that the government can essentially force a sale of the property, then use the proceeds from that sale to satisfy the owner’s overdue tax obligation. The owner gets to keep whatever proceeds may be leftover from the sale after subtracting the overdue taxes and fees, but because tax sales rarely if ever realize the full market value of a piece of property, there often is not much excess.
Additionally, although, like we mentioned, tax liens are not a full ownership interest in the property, they do sometimes allow lienholders to restrict the use of a piece of property to some degree. For example, because the property serves as collateral for the tax debt owed to the lienholder, the lienholder has an interest in keeping the property’s value as high as possible. Thus, in some instances a lienholder may be able to enjoin a property owner from taking certain action with respect to the property that would dramatically lower its value.
Finally, because a tax lien vests the government with an interest in the property subject to the lien, tax liens cloud the title to a piece of property. This means that if the owner sought to sell the property, a title search would reveal that he or she does not own the property free and clear. Rather, he or she owns it subject to the government’s tax lien. Accordingly, tax liens diminish the market value of a piece of property due to the lienholder’s right to foreclose on the property.
While tax liens are a serious matter, having one placed on your property by no means guarantees that you’ll lose the property. It doesn’t even guarantee that the government will force a tax sale in the first place. Indeed, it is not atypical for governments to work with property owners who demonstrate a desire and a good faith intention to satisfy their overdue tax obligation. But for property owners seeking to rely on a more concrete foundation than the goodwill of their local government, options exist to facilitate payment of overdue property taxes, thereby avoiding the government placing a tax lien on the property.
Property owners, of course, should pay their property taxes promptly when they become due, but the fact of the matter is extenuating circumstances often exist that may simply render it impossible to do so. This is where a unique type of loan comes into play, which can help property owners not only satisfy their tax obligation, but also allow them to do so on their own terms.
Property tax loans resemble other types of personal loans such as auto or home loans. Just as a person seeking to buy a car borrows money from a bank and then uses those funds to pay for the car, a person who is unable to pay their property taxes can take out a loan from a property tax lender, then use the proceeds of that loan to pay their property tax.
True, the property tax lender then takes a tax lien against the property and accordingly may foreclose if the owner defaults on his or her loan just as the government would. But the loan terms are often much more favorable and flexible than trying to avoid a government foreclosure.
There are two main situations that may cause a person to fall behind on his or her property taxes and accordingly need a property tax loan to satisfy their obligation.
The first is the quintessential situation where the person simply cannot afford to pay the tax. This could happen for any number of reasons, many of which are totally outside the property owner’s control. Furthermore, a property owner who finds himself or herself in this situation but also has steady income or other valuable assets is a prime candidate for a property tax loan because it is very likely that the owner has the ability to pay the property tax, yet simply lacks the cash on hand the moment it becomes due. The property tax lender would provide the cash to satisfy the tax obligation, then work with the owner to create a repayment schedule that fits his or her specific situation.
The second situation is when a person inherits a parcel of property. For example, if a person’s grandfather owns a piece of land and devises that land to the person in the grandfather’s will, that person becomes the legal owner of that piece of property, together with all the rights and responsibilities of owning the property. Land, of course, can be quite valuable, especially here in Texas, and even more so if the land contains unencumbered assets such as minerals, oil, or natural gas that no other party owns the rights to.
Thus, while the land itself is a valuable asset, the person who inherited it may likewise lack the cash necessary to pay the property taxes when they come due the following year. One option, of course, is to sell the property before it becomes encumbered with a tax lien, use some of the proceeds to pay the property tax, and pocket or reinvest the rest of the profit. But property is often much more than just a thing to own or a parcel of land. Rather, it has certain intrinsic value that money cannot quantify, thereby ruling out selling it from the list of available options. In this situation, a professional property tax lender can help meaningful pieces of property remain in the family and safe from the tax collector.
Before taking out a property tax loan, you should first consider whether you need one in the first place to avoid foreclosure. But there is one situation in particular that Texas property owners should know about. In Texas, even if a property owner has an overdue tax obligation, if the owner is disabled or over the age of 64, and the tax is owed on the owner’s homestead, it is often in the owner’s best interest to work with the county assessor to develop a payment plan or seek a tax deferral.
Next, property owners should consider whether a property tax loan will save them money in the long run. Like any loan, property tax loans carry interest. After all, charging interest is lenders’ primary way of making money. If an owner has the ability to pay the tax (for example, by using savings or liquidating assets), if the interest on the property tax loan would ultimately cost more than the asset is worth, doing so may be the more prudent course of action even though it means selling an asset or depleting a rainy day fund.
Finally, you should meet with a variety of lenders to get a sense for the loan products they offer and the way they do business in order to find a lender that fits your personal needs and style. No two borrowers are in the same situation, personally or financially. Thus, no single loan product will be exactly right for two borrowers.
In any event, it is crucial to find a lender that not only offers a product that is right for you and your specific financial situation, but also to find one that seeks to develop a relationship with its clients. Some lenders view foreclosures as a failure in the business relationship between the borrower and the lender, while others see more profit in foreclosure than in developing that relationship. Find a lender that fits in the former category, and your business relationship will be much more productive.
Property tax loans are an extremely useful tool that can help property owners regain control of their finances and the property that they have worked hard to acquire.
For more information, you can research property tax lenders through the state body responsible for regulating the consumer lending industry in Texas, the Office of Consumer Credit Commissioner, available at https://occc.texas.gov. You can also head to https://TPTLA.org to get more information on property tax lending from the industry’s leading trade group in Texas.
Information in this article is provided for general informational and educational purposes only. This article is not offered as legal advice upon which anyone may rely. Consult your attorney and tax advisor before making any decisions with legal or tax implications or consequences.