Lesson 1: Chapter 10 - Real Estate Taxes & Other Liens

Question 1

Liens

Answer 1

A lien is a charge or claim against property that is made to enforce the payment of money. The ownership of real estate is subject to certain obligations imposed by governmental powers, usually in the form of taxes. Creditors and courts can also make claims against property to secure payment for debts, by way of lien.

Liens are not limited to security (collateral) for borrowed money. Liens can be enforced against property by a government agency to recover taxes owed by the owner. A lien can be used to compel the payment of an assessment or other special charge as well.

A lien represents only an interest in property; it does not constitute actual ownership of the property. It is an encumbrance on the owner’s title.

Question 2

Collateral

Answer 2

Also called Security. Whenever someone borrows money, the lender generally requires some form of security. This is something of value that the borrower promises to give the lender if the borrower fails to repay the debt. When the lender’s security is in the form of real estate, the security is called a lien.

Question 3

Encumbrance

Answer 3

Any charge or claim that attaches to real property and lessens its value or impairs its use. An encumbrance does not necessarily prevent the transfer or conveyance of the property, but because it is “attached” to the property, it transfers along with it.

Question 4

Types of Liens

Answer 4

Classified by How they are Created:

• Voluntary Lien
• Involuntary Lien
  
  • Statutory Lien
  • Equitable Lien

Classified by the Type of Property Involved:

• General Lien
• Specific Lien

Question 5

Voluntary Lien

Answer 5

A voluntary lien is created intentionally by the property owner’s action, such as when someone takes out a mortgage loan.

Question 6

Involuntary Lien

Answer 6

Not a matter of choice; it is created by law or court. It may be either statutory or equitable.

Question 7

Statutory Lien

Answer 7

This is created by statute. A real estate tax lien, then, is an involuntary, statutory lien. It is created by statute without the property owner taking it on voluntarily.

Question 8

Equitable Lien

Answer 8

Created by a court to ensure the payment of a judgment as well by agreement.

Question 9

General Lien

Answer 9

General liens affect all the property, both real and personal, of a debtor. This includes judgments, estate and inheritance taxes, decedent’s debts, corporate franchise taxes, and Internal Revenue Service taxes. A lien on real estate differs from a lien on personal property. A lien attaches to real property as soon as it is filed. In contrast, a lien does not attach to personal property until the personal property is actually levied on or seized by the sheriff.

Question 10

Specific Lien

Answer 10

Are secured by specific property and affect only the particular property. Specific liens on real estate include:

• Mechanics Liens
• Mortgage Liens
• Real Estate Tax Liens
• Liens for Special Assessments and Utilities

Specific liens also secure personal property, as when a lien is placed on a car to secure payment of a car loan.

Question 11

Effects of Liens on Title

Answer 11

Existence of a lien does not necessarily prevent a property owner from conveying title to someone else. The lien might reduce the value of the real estate, however, because few buyers will take on the risk of a property that has a lien on it.

Because the lien attaches to the property, not the property owner, a new owner could lose the property if the creditors take court action to enforce payment.

Question 12

Priority of Liens

Answer 12

This refers to the order in which claims against the property will be satisfied. In general, the rule for priority of liens is “first to record, first in right” - liens take priority from the date they are recorded in the public records of the county in which the property is located.

Notable exceptions to this rule: Real estate taxes and special assessments generally take priority over all other liens, regardless of the order in which the liens are recorded.

Mechanics’ liens take priority as provided by state law but never over tax and special assessment liens.

Question 13

Subordination Agreements

Answer 13

Written agreements between lienholders to change the priority of mortgage, judgment, and other liens. Under a subordination agreement, the holder of a superior or prior lien agrees to permit a junior lienholder’s interest to move ahead of her lien.

Question 14

Two Types of Real Estate Taxes

Answer 14

General Real Estate Taxes
Special Assessments

Both are levied against specific parcels of property and automatically become tax liens on those properties.

Question 15

General Real Estate Taxes

Answer 15

Also called ad valorem taxes (according to value) - are based on the value of the property being taxed. They are specific, involuntary, statutory liens. They are charged by the various government agencies and municipalities including:

• States
• Counties
• Cities, towns, and villages
• School districts (local elementary and high schools, publicly funded junior colleges and community colleges)
• Drainage districts
• Water districts
• Sanitary districts
• Parks, forest preserves, recreation and other public-use districts

Question 16

Exemptions from General Taxes

Answer 16

Such property must be used for tax-exempt purposes, as defined in the statutes. The most common exempt properties are owned by:

• Various municipal organizations (schools, parks and playgrounds)
• Cities and counties
• State and federal governments
• Religious and charitable organizations
• Hospitals
• Educational institutions

Question 17

Illinois Exemptions from General Taxes

Answer 17

Properties in Illinois:that are totally exempt from paying general real estate taxes include schools, religious institutions, cemeteries, and charitable institutions, as well as those owned by federal, state, county and local governments.

Illinois property taxes are adjusted to reflect certain concessions given on owner occupied residences. These properties are designated as homesteads. A homestead exemption reduces the assessed value of a property subject to taxes.

Basic exemptions include (but may vary from county to county):

• Homeowner exemption applies to owners of single-family homes, condos, cooperatives, and 1-6 unit apartment buildings.
• Senior citizen homestead exemption is available to homeowners over 65.
• The Senior Citizen Assessment Freeze Homestead Exemption program allows Illinois seniors to freeze their assessed valuation for the remainder of their lifetime once they have turned 65 if household income does not exceed $55K.
• Home improvement exemption allows any Illinois homeowner who has recently improved her home to forestall an increase in the home’s overall assessed value for up to four years.

Question 18

Assessment

Answer 18

Real estate is valued for tax purposes by county or township assessors or appraisers. The official valuation process is called assessment. A property’s assessed value is generally based on the sales price of comparable properties; although practices may vary.

Question 19

Assessment in Illinois

Answer 19

Depending on how the property is classified, real property in Cook County is assessed based on a sliding scale of percentages of fair market value, from 10% to 25%. In all other counties, real property is assessed at 331/3% of fair market value.

Question 20

Equalization Factor

Answer 20

May be applied to raise or lower assessments in a particular district or county. The basic assessed value value of each property in the area is multiplied by the equalization factor to acquire an “equalized assessment”, then any exemptions are subtracted, and last, the tax rate is applied.

In some jurisdictions, when it is necessary to correct inequalities in statewide tax assessments, an equalization factor is used to achieve uniformity.

Question 21

Appropriation

Answer 21

Formal appropriation is the way a taxing body actually authorizes the expenditure of funds and provides for the sources of the funding. Appropriation generally involves the adoption of an ordinance or the passage of a law that states the specific terms of the proposed taxation. The amount to be raised from the general real estate tax is then imposed on property owners through a tax levy. A tax levy is the formal action taken to impose the tax, usually by way of a vote of the taxing district’s governing body.

Question 22

Tax Levy

Answer 22

A tax levy is the formal action taken to impose the tax, usually by way of a vote of the taxing district’s governing body.

Question 23

Tax Bills In Illinois

Answer 23

The county collector prepares and issues only one combined tax bill to each parcel of property.

General real estate taxes are levied annually for the calendar year and become a prior first lien, superior to all other liens, on January 1 of that tax year. However, they are not due and payable until the following year.

General real estate taxes are payable in two equal installments in the year after they are levied: one-half by June 1 and the second half by September 1 (except in Cook County, as noted later). Taxes in Illinois are said to be “paid in arrears”. The payment due dates are also called penalty dates, after which a penalty of 1.5% per month is added to any unpaid amount.

Question 24

Calculating Real Estate Taxes

Answer 24

Assessed Value x Equalization Factor - Exemptions x Tax Rate = Annual Tax

Question 25

Enforcement of Tax Liens

Answer 25

When a property owner fails to pay taxes on real estate in Illinois, the property ultimately may be sold in one of the following three ways:

• At an annual tax sale
• At a forfeiture sale
• At a scavenger sale

Question 26

Annual Tax Sale

Answer 26

If the taxes on a property have not been paid by the due date of the second installment, the county collector can enforce the tax lien and request that the circular court order a tax sale.

The county has notification requirements that are prescribed by statute: they include a publication in a newspaper and general circulation within the community and a certified or registered mailing to the last known address of the taxpayer.

Before the time of the sale, the owner and any other party with a legal interest (except undisclosed beneficiaries of a land trust), may redeem the property and stop the sale by paying the delinquent taxes, applicable interest, and publication costs.

Successful purchasers at the sale are those who offer to pay all outstanding taxes, interest, publication costs, processing charges, and the county treasurer’s indemnity fund fee. Upon payment, the purchaser receives a certificate of purchase. The certificate of purchase will ripen into a tax deed if no redemption is made within the statutorily prescribed period. The tax deed must be recorded within on year after the expiration of the redemption period or else it is void with no right of reimbursement.

Question 27

Tax Deed

Answer 27

The certificate of purchase from an annual tax sale will ripen into a tax deed if no redemption is made within the statutorily prescribed period. The tax deed must be recorded within on year after the expiration of the redemption period or else it is void with no right of reimbursement.

Question 28

Illinois Annual Tax Sale

Answer 28

The statutory period allowed for redemption on properties with 6 or fewer units is 2.5 years from the date of sale. If the property is not redeemed by the owner within the period allowed, the tax sale purchaser is required to give notice to the delinquent owner and other parties who hold any interest in the property before applying for a tax deed.

Question 29

Forfeiture Sale

Answer 29

If there are no bids on a property at the annual tax sale, the property is forfeited to the state; although title does not really change. The owner still may redeem the property after forfeiture by paying delinquencies, publication costs, and interest. On the other hand anyone who wants to purchase the property for the outstanding taxes may make application to the county.

If this happens and the owner does not claim the property within 30 days of notification, the applicant will be issued a certificate of purchase after paying the outstanding taxes, interest, and other fees. If redemption is later made by the original owner, the certificate holder must be compensated based on 12% interest for each six months the certificate was held.

Question 30

Special Assessments

Answer 30

Also called Improvement Taxes - are taxes levied on real estate to fund public improvements to the property. Property owners living nearest to the improvements are required to pay for them because their properties benefit directly from the improvements. (i.e. installation of paved streets, curbs, gutters, storm sewers, lighting, etc).

In Illinois: special assessments are always specific and statutory, but they can be either involuntary or voluntary liens. Improvements initiated by a public agency create involuntary liens. However, when property owners petition the local government to install a public improvement for which owners agree to pay, the assessment lien is voluntary.

Question 31

Scavenger Sale

Answer 31

If the taxes have not been paid on a property for two years or more, the property may be sold at a scavenger sale. The county must go through the same court process as for a tax sale and receive an order of sale. The property is sold to the highest bidder. The buyer is not required to pay the tax lien but must pay current taxes.

In this case, former owners may not bid on their delinquent properties.

Question 32

Special Service Areas (SSA’s) In Illinois

Answer 32

Special taxing districts in municipalities that are established by ordinance, often at the requested of developers of new housing subdivisions, in order to pass on the cost of the streets, landscaping, water lines, and sewer systems to homeowners who reside within the SSA.

Question 33

Mortgage Lien

Answer 33

Also called a deed of trust lien. This is a voluntary lien on real estate given to a lender by a borrower as a security for a real estate loan.

It becomes a lien on real property when the lender records the documents in the county where the property is located. Lenders generally require a preferred lien, called a “first mortgage lien”. This means that no other liens against the property (aside from real estate taxes) would take priority over the mortgage lien. Subsequent liens are called junior liens.

Question 34

Junior Liens

Answer 34

Lenders generally require a preferred lien, called a “first mortgage lien”. This means that no other liens against the property (aside from real estate taxes) would take priority over the mortgage lien. Subsequent liens are called junior liens.

Question 35

Mechanic’s Lien

Answer 35

Is a specific, involuntary lien that gives security to persons or companies that perform labor or furnish material to improve real property. A mechanic’s lien is available to contractors, subcontractors, architects, equipment lessors, surveyors, laborers, and other providers.

This type of lien is filed when the owner has not fully paid for the work or when the general contractor has been compensated but has not paid the subcontractors or material suppliers.

To be entitled to a mechanic’s lien, the person who did the work must have had a contract (express or implied) with the owner or the owner’s authorized representative.

Contractors who wish to enforce their lien must file their lien notices within four months after the work is completed.

Question 36

Notice of Nonresponsibility

Answer 36

If improvements that were not ordered by the property owner have commenced, the property owner can execute a document called a notice of Nonresponsibility to attempt to relieve herself from possible mechanic’ liens.

Question 37

Illinois Mechanic’s Lien Act

Answer 37

Under the notice requirements, a contractor who makes improvements to an owner-occupied, single family residence must give the owner written notice within 10 days after recording a lien against any property of the owner. If timely notice is not given and, as a result, the owner suffers damages , the lien is extinguished to the extent of the damages.

Mechanics’ liens can take priority over a previously recorded lien if the work done has enhanced the value of the property. The lien attaches to the date when the work was ordered or the contract was signed by the owner.

Question 38

Lien Waivers

Answer 38

Also called “waivers of lien”, should be collected by the landowner from each contractor and subcontractor to create a continuing record that all lien claimants have released their lien rights.

Question 39

Illinois Expiration of Lien Right and Commencement of Suit

Answer 39

In Illinois, the contractor’s lien right will expire two years after completion of that contractor’s work, unless he files suit within the that time to foreclose the lien.

Question 40

Judgment

Answer 40

An order issued by a court that settles and defines the rights and obligations of the parties to a lawsuit. A judgment is a general, involuntary, equitable lien on both real and personal property owned by the debtor.

Question 41

Money Judgment

Answer 41

When the judgment establishes the amount a debtor owes and provides for money to be awarded, it is called a money judgement. A judgment is a general, involuntary, equitable lien on both real and personal property owned by the debtor.

Question 42

Judgment in Illinois

Answer 42

A judgment becomes a general lien on all the defendant’s real property in a county at the time the judgment is recorded in the county recorder’s office.

Judgment liens are effective in Illinois for seven years and may be renewed for another seven-year term.

Question 43

Writ of Execution

Answer 43

To enforce an actual judgment, a creditor must obtain a writ of execution from the court. A writ directs the sheriff to seize and sell as much of the debtor’s property as is necessary to pay both the debt and the expenses of the sale.

Question 44

Satisfaction of Judgment

Answer 44

When property is sold, the debtor should demand a satisfaction of judgment (also called “satisfaction piece”) to clear the record.

Question 45

Lis Pendens

Answer 45

When any suit is filed that affects a title to real estate,
a special notice called a lis pendens (Latin for “litigation pending”) is recorded. A lis pendens is not itself a lien, but rather a notice of a possible future lien.

Question 46

Writ of Attachment

Answer 46

Special rules apply to realty that is not mortgaged or similarly encumbered. A creditor seeks a writ of attachment to prevent a debtor from conveying title to such previously unsecured real estate while a court suit is being decided. By this writ, the court retains custody of the property until the suit concludes.

The creditor must post a surety bond or deposit with the court. The bond must be sufficient to cover any possible loss or damage the debtor may suffer while the court has custody of the property.

Question 47

Estate Taxes & Inheritance Taxes

Answer 47

as well as the debts of the decedents - are general, statutory, involuntary liens that encumber a deceased person’s real and personal property. These are normally cleared in probate court proceedings.

Question 48

Liens for Municipal Utilities

Answer 48

Municipalities often have the right to impose a specific , equitable, involuntary lien on the property of an owner who refuses to pay bills for municipal utility services.

Question 49

Bail Bond Liens

Answer 49

A real estate owner who is charged with a crime for which they must face trial may post bail in the form of real estate rather than cash. The execution and recording of such a bail bond creates a specific, statutory, voluntary lien against the owner’s real estate.

Question 50

Corporation Franchise Tax Lien

Answer 50

State governments generally levy a corporation franchise tax on corporations as a condition of allowing them to do business in a state. Such a tax is a general, statutory, involuntary lien on all real and personal property owned by the corporation.

Question 51

Federal Tax Lien

Answer 51

Also called an IRS tax lien - results from a person’s failure to pay any portion of federal taxes, such as income and withholding taxes. A federal tax is a general, statutory, involuntary lien on all real and personal property held by the delinquent tax payer.

It’s priority however, is based on the date of filing or recording; it does not supersede previously recorded liens.

Question 52

Commercial Real Estate Broker Lien Act (770 ILCS 15)

Answer 52

Permits commercial sponsoring brokers to place a lien on property in the amount of the commission they are entitled to receive for leasing, as well as for a sale under a written brokerage agreement in the event they are not paid for their services.

The lien applies to commercial property only, and must be recorded before closing to be enforceable.