When a senior citizen's property is foreclosed for delinquent taxes and ends up in the county's hands, does the Washington Department of Revenue's lien for unpaid deferred taxes survive? If the county later sells the property, does the Department get paid first?
Plain-English summary
Director Brad Flaherty of the Department of Revenue asked the AG how Washington's senior tax deferral program interacts with county tax foreclosure. RCW 84.38 lets eligible low-income seniors defer property taxes and special assessments on their primary residence, up to 80% of their equity. The Department pays the deferred amounts to the counties as those amounts become due, and the state gets a lien on the property under RCW 84.38.100 with priority "as provided in chapters 35.50 and 84.60 RCW." When one of several events occurs (sale, death, ceasing to permanently reside on the property), the Department collects the deferred amounts plus interest. If the Department cannot collect, the amounts revert to the county's normal property-tax-collection system.
The question is what happens when collection through the county system fails. Property goes through tax foreclosure. No bidder buys at the foreclosure sale. Title vests in the county. The county later sells the property to a willing buyer. Does the Department's deferral lien (1) survive the foreclosure and (2) get priority payment when the county sells?
The AG's answer was no on both counts.
Why the lien dies at foreclosure. When a county takes property through a tax foreclosure where there is no successful bidder, all taxes due are canceled. The property becomes county tax-title property and is exempt from taxation while in the county's hands. This is the standard rule for tax foreclosures: the foreclosure clears the title of all tax liens, junior to and concurrent with the foreclosed-on tax, because the property is now starting fresh in the county's hands.
The deferral lien under RCW 84.38.100 is a tax-style lien. It enjoys the same priority position as other tax liens under chapters 35.50 and 84.60. When the foreclosure clears the title of those tax liens, it clears the deferral lien too. There is no special carve-out in RCW 84.38 that preserves the deferral lien through foreclosure.
Why the Department gets no priority on the later sale. When the county later sells the property, the apportionment statute is RCW 36.35.110. That statute distributes the sale proceeds to "taxing districts" in which the property is located, based on "the tax levies of the year last in process of collection." The Department of Revenue is not a "taxing district" in the property-tax sense; it administers the deferral program, but it is not levying its own property tax. So the Department's claim for previously deferred amounts has no place in the RCW 36.35.110 apportionment.
That said, the Department, as the administrator that paid the deferred amounts to the counties, may have indirect interest in the apportionment. If the same county that held the deferral lien is among the taxing districts receiving sale proceeds, the county will receive its proportionate share of the levy from the year last in process. But this is the county's claim under the apportionment statute, not the Department's claim under the deferral statute.
The practical upshot: when a deferral case goes all the way to tax foreclosure with no bidder, the Department's deferred-tax investment is essentially written off. The state has lent the senior citizen the deferred taxes year by year, paid those amounts to the relevant counties on the senior's behalf, and ends up with nothing recoverable when the foreclosure-and-sale process plays out. The legislature could have written a different rule (preserving the deferral lien through foreclosure, or giving the Department a priority claim on later sale proceeds), but it did not.
Currency note
This opinion was issued in 2012. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.
Common questions
What is the senior property tax deferral program?
A program created in 1975 (Laws of 1975, 1st Ex. Sess., ch. 291, § 26) that lets eligible seniors defer payment of property taxes and special assessments on their primary residence, up to 80% of their equity. Eligibility is income-based. The Department pays the deferred amounts to the counties on the senior's behalf, and a state lien attaches to the property to secure repayment.
What triggers collection of deferred taxes?
Sale of the property by the senior, the senior's death, or the senior ceasing to permanently reside on the property. At any of these events, the Department becomes entitled to collect the deferred amounts plus interest.
What is "tax title" property?
County-owned property acquired through tax foreclosure when no bidder purchased at the auction. Once title vests in the county, the property is exempt from further taxation while held by the county.
Why doesn't the deferral lien survive foreclosure?
Because the foreclosure cleanses the title of tax liens generally. The deferral lien under RCW 84.38.100 is a tax-style lien with the same priority as other tax liens. The legislature could have given it a higher priority or preserved it specifically, but it did not.
Could a senior's heirs or successors avoid this outcome?
By paying the deferred amounts before foreclosure. Once the deferral conditions are triggered (death, sale, ceasing residence), the Department is entitled to collect. If the senior or family pays at that point, the lien is satisfied. The foreclosure-and-write-off scenario only arises when no one pays and the county system runs its course.
What about a mortgage co-signer or contract holder?
RCW 84.38.090 requires a mortgage or purchase contract holder to cosign the declaration of deferral. RCW 84.38.100 says the deferral lien may be subject to the cosigner's interest. So a mortgage may take priority over the deferral lien depending on its terms. The opinion does not address how a mortgage affects the foreclosure outcome.
What's the policy concern this raises?
The deferral program functions as an unsecured lending program when the property goes through tax foreclosure. The state effectively loses the deferred amounts. The legislature could rewrite the priority rules, but it has not.
Background and statutory framework
RCW 84.38 is the deferral program. RCW 84.38.100 creates the lien. RCW 84.38.120 directs the Department to pay the counties. RCW 84.38.110 governs assessor reporting.
Tax foreclosure proceedings are governed by RCW 84.64. RCW 84.64.050 specifies foreclosure procedures. When no bidder appears, title vests in the county and the property becomes county tax-title property.
RCW 36.35.110 governs apportionment of proceeds when the county later sells tax-title property. Apportionment is to taxing districts based on "the tax levies of the year last in process of collection."
The lien priority chapters referenced in RCW 84.38.100 are RCW 35.50 (city/town liens) and RCW 84.60 (priority of property tax liens).
Citations and references
Statutes:
- RCW 84.38, .010, .030, .040(1), .090, .100, .110(3), .110(4), .120
- RCW 84.64, .050 (tax foreclosure)
- RCW 36.35.110 (apportionment of proceeds)
- RCW 35.50 (city/town lien priority)
- RCW 84.60 (property tax lien priority)
Legislative history:
- Laws of 1975, 1st Ex. Sess., ch. 291, § 26 (creating deferral program)
Source
Original opinion text
Attorney General Rob McKenna
TAX TITLE LAND—TAXATION—LEINS—Deferral Of Property Taxes
The lien in favor of the state for payment of deferred property taxes and special assessments created under RCW 84.38.100 is canceled when a county acquires title to the property through foreclosure for delinquent taxes. Where the county later sells such property, sales proceeds are apportioned pursuant to RCW 36.35.110.
April 20, 2012
The Honorable Brad Flaherty
Director, State Department of Revenue
PO Box 47454
Olympia, WA 98504-7454
Cite As:
AGO 2012 No. 3
Dear Mr. Flaherty:
By letter previously acknowledged, you have requested our opinion on the following questions:
Does a lien created under RCW 84.38.100 remain in effect after a county acquires property subject to such a lien at a tax foreclosure sale?
If the lien created under RCW 84.38.100 remains in effect, should it be paid before excess proceeds are distributed under RCW 36.35.110?
BRIEF ANSWER
Your question relates to a statutorily-created tax deferral program for low income senior citizens. The purpose of the program is to allow such persons to provide for their own needs, without requiring assistance from public welfare programs. Under the deferral statutes, the Department of Revenue pays the property taxes and special assessments that become due, up to eighty percent of a qualified owner’s equity in the property. The property owner’s obligation to pay the taxes is thereby deferred, until one of several statutorily-designated events occurs, including the qualified owner’s sale of the property, death, or ceasing to permanently reside on the property. Under the governing statutes, upon such an event, the Department is to collect the amounts deferred, plus interest. If, however, the Department is unable to collect the amount due, the law directs that the amounts shall be collected by the county treasurer through the statutory system for collecting property taxes.
Your inquiry concerns circumstances where the Department is not able to collect the amounts due, the tax collection system results in a foreclosure sale of the property for delinquent taxes, and no bidder purchases the property at foreclosure. When that occurs the law provides that title vests in the county, all taxes due are canceled, and the property is exempt from taxation
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in the county’s hands. The law further provides that, if and when the property is later sold by the county, the proceeds of the sale are apportioned to the taxing districts in which the property is located, according to the tax levies of the year last in process of collection.
As explained more fully below, we conclude that under the circumstances about which you inquire (and as is the case with other delinquent taxes) the Department’s lien for deferred taxes and special assessments is canceled when the county acquires the property at foreclosure. Accordingly, upon subsequent sale of the property by the county, the Department is not entitled to priority payment for amounts secured by its prior lien. It is entitled to apportionment of sales proceeds according to the tax levies of the year last in process of collection.
BACKGROUND
To provide context to your question, we begin with background information regarding deferrals under RCW 84.38, followed by general principles of state tax foreclosures. We then apply these general principles to your questions.
A. The Deferral Law
In 1975, the legislature created a program whereby eligible senior citizens could defer payment of property taxes and special assessments on their primary residences. Laws of 1975, 1st Ex. Sess., ch. 291, § 26. The program was intended “to assist retired persons in maintaining their dignity and a reasonable standard of living by residing in their own homes, providing for their own needs, and managing their own affairs without requiring assistance from public welfare programs.” RCW 84.38.010. Eligible senior citizens may defer payment of real property taxes and special assessments up to eighty percent of the value of their residences. RCW 84.38.030. To apply for this program, the claimant must file a declaration of deferral with a local county assessor. RCW 84.38.040(1).
The county assessor computes the amount of property taxes and special assessments deferred each year and notifies the Department, among others, of the amounts deferred. RCW 84.38.110(3), (4). The Department is then responsible for paying the amounts of property taxes or special assessments deferred to the respective counties and local government entities. RCW 84.38.120. If taxes are deferred after the issuance of a certificate of delinquency for nonpayment of taxes, but before a tax foreclosure, the Department is responsible for paying the county treasurer the amount of taxes due along with foreclosure costs, interest, and penalties. RCW 84.38.120; RCW 84.64.050.
The state then obtains a lien against the property in question for the taxes and assessments deferred. The amount deferred, along with interest, “shall become a lien in favor of the state upon his or her property and shall have priority as provided in chapters 35.50 and 84.60 RCW[.]” RCW 84.38.100. The lien may be subject to the interest of a mortgage or purchase contract holder who is required to cosign a declaration of deferral under RCW 84.38.090. RCW 84.38.100.
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Deferred taxes and assessments become payable by the claimant or his or her estate in several different circumstances, such as sale of the property, death of the claimant, or when the claimant no longer qualifies for the deferral. RCW 84.38.130. At such time, it is initially the Department’s responsibility to collect the amounts deferred. RCW 84.38.140(1). If the Department is unable to do so, the “amount deferred together with interest shall be collected by the county treasurer in the manner provided for in chapter 84.56 RCW,” and RCW 84.60 and 84.64 also apply. RCW 84.38.140(1). These chapters address collection of property taxes, tax liens, and foreclosure of tax liens. Any amounts collected are deposited in the state general fund to reimburse the state for its prior payment of the claimant’s deferred taxes and assessments. RCW 84.38.140(2).
B. The Tax Collection, Tax Lien, And Tax Lien Foreclosure Process
As noted, the deferred taxes and assessments are collected pursuant to the statutes governing property tax collection and foreclosure—RCW 84.56, 84.60, and 84.64. RCW 84.38.140(1). Generally speaking, tax liens are created when taxes are assessed but have not been paid. RCW 84.60.020. After taxes are delinquent for three years, the county treasurer issues a certificate of delinquency to the county for the unpaid taxes, interest, and costs. RCW 84.64.050. A certificate may also include any unpaid assessments the county treasurer is responsible for collecting. RCW 84.64.050. The certificate of delinquency allows the county treasurer to foreclose on the property by obtaining a judgment to foreclose. RCW 84.64.050.
Once a property is foreclosed on, including properties that were once subject to deferral, the county holds a foreclosure sale. RCW 84.64.080. The county is required to sell the property to the highest bidder; the minimum bid is the total amount of taxes, interest, and costs due. RCW 84.64.080. A bidder, other than the county, must “pay the full amount of taxes, interest and costs for which judgment is rendered, together with all taxes, interest and costs which are delinquent at the time of sale, regardless of whether the taxes, interest, or costs are included in the judgment.” RCW 84.64.200.
If no bids are received during the foreclosure proceeding, “the county shall be considered a bidder” for “the amount of all taxes, interest and costs due thereon, and where no bidder appears, acquire[s] title in trust for the taxing districts as absolutely as if purchased by an individual under the provisions of this chapter[.]” RCW 84.64.200. Importantly, however, unlike other bidders, the county is not required to pay the taxes, interest, and costs due. RCW 84.64.200. The county holds the property until it is subsequently sold to a third party.
Your questions involve the status of the state’s deferral lien once the county acquires the property at a foreclosure sale and then subsequently sells such property. Your concern arises as to whether the state’s lien continues and, if it does, whether the county is required to reimburse the state from proceeds of selling the property for any of the payments made before proceeds are distributed under RCW 36.35.110.
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ANALYSIS
- Does a lien created under RCW 84.38.100 remain in effect after a county acquires property subject to such a lien at a tax foreclosure sale?
Your first question is whether the lien created by RCW 84.38.100 remains in effect after property is acquired by a county by tax deed. We conclude the state’s deferral lien no longer encumbers property acquired by the county for lack of other bidders at a tax foreclosure sale. “[L]and acquired by the county for lack of other bidders at a tax foreclosure sale” is referred to as “tax title lands.” RCW 36.35.020. We also conclude that, upon sale of tax title lands by the county, the proceeds are distributed to other taxing districts, including the state, as provided by RCW 36.35.110.
The county acquires tax title lands “in trust for the taxing districts as absolutely as if purchased by an individual under the provisions” of RCW 84.64. RCW 84.64.200. The county acquires tax title lands through a tax deed. RCW 36.35.110. Pursuant to RCW 36.35.110:
No claims shall ever be allowed against the county from any municipality, school district, road district or other taxing district for taxes levied on property acquired by the county by tax deed under the provisions of this chapter, but all taxes shall at the time of deeding said property be thereby canceled[.]
Although RCW 36.35.110 does not specifically identify the state as a taxing district, the statute expressly applies to “other taxing district[s]” as well as those specified. Consequently, it is necessary to determine whether the state would be a taxing district under RCW 36.35.110.
The term “taxing district” is not defined for purposes of RCW 36.35. However, under RCW Title 84, which concerns property taxes, the state is a taxing district. “‘Taxing district’ shall be held and construed to mean and include the state[.]” RCW 84.04.120. Although this definition is included in a different title, the two are interrelated as they both apply to the foreclosure process for county tax title lands. Additionally, RCW 36.35.110 was previously codified in RCW 84.64.230, which was subject to RCW 84.04.120’s definition of taxing district. RCW 84.64.230 was recodified as RCW 36.35.110 in 1998 without any change to the language in question. Laws of 1998, ch. 106, § 23. Consequently, we conclude the state is a taxing district under RCW 36.35.110.
Pursuant to RCW 36.35.110, at the time the property is acquired by the county through foreclosure, the state is precluded from bringing claims against the county for taxes levied on the property and “all taxes” are “thereby canceled.” Your inquiry suggests that the deferral liens at issue are not tax liens and, thus, are not canceled. While RCW 84.38 does not explicitly provide that the lien for deferred real property taxes constitutes a tax lien, it plainly arises from the property owner’s deferral of the payment of property taxes that the property owner owes, and the lien on the claimant’s property secures the claimant’s obligation to pay the state for the taxes and assessments deferred. Additionally, RCW 84.38.140(1) explicitly states for the purposes of collecting the deferred amounts, the statutes governing liens for taxes apply. Considering the
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statutory scheme for the deferred taxes as a whole, it appears the legislature considered a deferral lien to be a type of tax lien. Accordingly, we conclude that the lien is a tax lien. [1]
The legislature has addressed in statute the disposition of any proceeds the county receives from selling tax title lands. Proceeds from the sale of tax title lands are to be distributed in accordance with RCW 36.35.110. This statute provides, in relevant part:
[T]he proceeds of any sale of any property acquired by the county by tax deed shall be justly apportioned to the various funds existing at the date of the sale, in the territory in which such property is located, according to the tax levies of the year last in process of collection.
RCW 36.35.110.
Accordingly, upon sale of the property the proceeds are to be distributed proportionately to the various funds existing at the date of sale.
- If the lien created under RCW 84.38.100 remains in effect, should it be paid before excess proceeds are distributed under RCW 36.35.110?
Your second question arises only if the lien at issue remains in effect after the county acquires the property through foreclosure. Having concluded that the state’s tax deferral lien does not encumber tax title lands, we do not reach your second question.
We trust that the foregoing will be useful to you.
ROBERT M. MCKENNA
Attorney General
ANNIKA M. SCHAROSCH
Assistant Attorney General
[1] Even if one were to treat the lien for deferred taxes at issue as a different kind of lien, we conclude that it would be canceled when the county acquires the property as tax title land. A tax foreclosure cuts off a variety of types of liens. Craver v. Wehr, 98 Wash. 56, 59, 167 P. 98 (1917); Randall Thomsen, Washington State Property Tax Foreclosures: Quoerere Dat Sapere Quoe Sunt Legitima Vere, 32 Gonz. L. Rev. 123, 142-49 (1996-97). When the county aquires the property as tax title lands, the effect on liens is substantial. “It is the settled law of this state that, if a county purchases property at a foreclosure proceeding . . . and subsequently sells that property to a third party, the party purchasing from the county takes title free and clear of any kind or character of prior liens.” Wolff v. Comm’l Waterway Dist. 1, 14 Wn.2d 45, 47, 127 P.2d 262 (1942) (emphasis added); see also Anderson v. Grays Harbor Cnty., 49 Wn.2d 89, 91, 297 P.2d 1114 (1956).