By Greg George, Attorney
Coeur d’Alene, Idaho, February 22, 2018. As we’ve all heard, only two things are certain in life: death and taxes. And while the impact of death on property ownership is well-trodden ground—occupying the careers of estate planners and other professionals—the impact of taxes is less frequently discussed. But unpaid taxes can significantly affect your ownership rights in property.
Aside from other legal consequences, non-payment of taxes can result in a lien being recorded against your property. Idaho Code section 45-101 defines a “lien” as “a charge imposed in some mode other than by a transfer in trust upon specific property by which it is made security for the performance of an act.” In other words, a lien is a way of saying “if you don’t pay me, I can sell your property to pay your debt.”
Federal and Idaho law are clear that liens on property can arise if someone doesn’t pay their taxes. The federal tax code expressly states the amount of an unpaid federal tax (including any interest, penalty, or additional amounts, or other costs) is “a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.” 26 U.S.C. § 6321. Translated from legalese, that means all property you own—your house, your car, your boat, etc.—can get slapped with a lien if you’re behind on federal taxes. This federal tax lien continues until the outstanding tax liability is paid or until the lien “becomes unenforceable by reason of lapse of time.” 26 U.S.C. § 6322.
The IRS has ten years to collect a tax after assessing it (unless the IRS and the taxpayer have otherwise agreed). 26 U.S.C. § 6502.
There is also a lien under Idaho law for outstanding Idaho taxes. That lien applies to “all property and rights to property, whether real or personal, belonging to [the taxpayer] or acquired afterwards and before the lien expires.” I.C. § 63-3051. The lien applies for five years unless it is extended. I.C. § 63-3056. There is no limit in the Idaho Code on how many times the State can extend a tax lien. Therefore, an Idaho State tax lien can remain valid forever, so long as the State extends it before it expires.
Although the tax liens described above can be foreclosed, they often aren’t. In many cases, the IRS or the Idaho State Tax Commission will keep the lien on the property without foreclosing. That has multiple effects on the taxpayer. It will usually harm the taxpayer’s credit and prevent refinancing on the property. And it will also prevent a sale from closing unless the outstanding tax amount is paid off first. Therefore, a tax lien can be very detrimental even if the tax agency doesn’t foreclose.
Special attention should be paid to property tax liens. Under Idaho law, all real property taxes are a “first and prior lien” on the property. I.C. § 63-206(1). Being a “first and prior” lien means it must be paid first before any other debts chargeable against the property (e.g., a mortgage). If property taxes aren’t paid for three years, the county can issue a “tax deed” to itself for the property. I.C. § 63-1005(1). Before doing so, however, the county must provide notice to the delinquent taxpayer and hold a hearing. Id.; I.C. § 63-1006.
If the outstanding tax isn’t paid before the hearing, and the county meets the legal requirements for providing notice, then the county commissioners will vote to issue a tax deed to the county. I.C. § 63-1006. The county can then sell the property at auction, unless the taxpayer “redeems” the property by paying the outstanding taxes before the sale. I.C. § 63-1007.
If the property is not redeemed before sale by the county, the person buying the property receives a deed sometimes called a “county deed” or a “commissioners’ deed.” The person buying the property from the county receives the same title that the previous owner (before the county took the property) had. I.C. § 63-1009. However, the title conveyed by the county deed is free from any recorded mortgage, deed of trust, security interest, lien, or lease so long as the holder(s) of those documents received the notice required under Idaho law. I.C. § 63-1009.
Idaho Code section 63-1009 was amended in 2016. The prior version of Idaho Code section 63-1009 stated the tax deed removed all “encumbrances” from the property (except mortgages of record the holders of which had not been provided notice, the lien for property taxes, and liens for special assessments). There is a still-pending question before the Idaho Supreme Court of whether the term “encumbrances” in the old section 63-1009 included non-financial property interests such as easements, restrictive covenants, etc. such that a pre-2016 tax deed wiped out those property interests. See Regan v. Owen, Idaho Supreme Court 2017 Opinion No. 98 (opinion filed September 8, 2017; rehearing held December 15, 2017, opinion on rehearing still pending as of date of this post). [See GMG 9/28/2017 BLOG POST REGAN V. OWEN].
Note: This post is not legal advice, and should not be relied upon as such. Different sets of facts will likely lead to different legal conclusions. If you need assistance with real property matters, call Bristol George, PLLC at 866-511-1500 for a forty-five minute, no charge consultation to see if we can help.
— END —