Many hidden costs come with homeownership. Most understand the mortgage and interest payments they will make each month. There are also utilities to pay for, such as electricity, water, gas, and other services.
When you own a home, you are responsible for making repairs and paying for maintenance or upgrades, which costs roughly 1% of the home’s value each year.
Another major expense homeowners must pay is property taxes. Homeowners must pay taxes on properties to their local municipality. Failure to pay taxes can result in a tax deed. A tax deed is when the property owner doesn’t pay property taxes, and the property is transferred to the government.
The property may be sold at a tax deed sale to the highest bidder. Read on to learn more about tax lien property owners, local and municipal laws, and the difference between a tax deed and tax lien states.
Property Taxes and Delinquency
Property taxes go toward the local government to pay for public services. They are assessed as a percentage of the home’s appraised value and are typically paid once a year. If you have an escrow account for your mortgage, you will pay a monthly portion toward the tax bill, which will be taken out whenever the property taxes are due to the local government.
When property owners fail to pay property taxes on time, they could lose their homes to the government or other eager buyers. You could lose your home or real estate investments through a tax deed or tax lien for unpaid property taxes.
How this process plays out depends on the regulations of the local government, the amount of money owed, and the state laws regarding unpaid taxes.
What Happens When Property Taxes Go Unpaid
If you fail to pay property taxes when they are due, several consequences may occur. First, you must pay back the amount owed and any penalties for the late payment. Often, real estate taxes owed will accrue interest, so the amount you eventually pay to the government is more than the initial tax bill.
If you fail to pay back the delinquent taxes and any associated penalties or interest, you risk losing possession of your real estate. All the equity you have built will be wasted if the government or another party can claim possession of your home because of your tax debt.
If you’re considering ways to resolve delinquent property taxes, a short sale may be your best option.
What is a Tax Lien?
A tax lien is one strategy for addressing outstanding property taxes. A tax lien is a legal claim on real estate when the owner fails to pay their property taxes. It gives the government a security interest in the property so that it will receive the owed amount.
Whoever purchases the tax lien for a property gets a tax lien certificate. If the property owner can pay the debt they owe, they will pay it to the tax lien holder. If not, the lien holder can claim home possession through foreclosure.
Tax Lien States
Numerous states allow tax lien sales. The government or private investors can purchase tax liens at a public sale in these locations. The tax lien investor will then be owed the purchase amount plus interest, making it a viable option for investors. If the property owner does not pay what they owe, the tax lien purchaser can claim possession after a certain time.
Currently, 24 states allow tax lien certificate sales: Alabama, Arizona, Colorado, Florida, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Missouri, Montana, Nebraska, Nevada, New Jersey, New York, Ohio, Rhode Island, South Carolina, Vermont, West Virginia, and Wyoming.
The Process of a Tax Sale
Most tax lien certificate states hold public sales for interested investors. A public auction typically grants the upcoming tax lien to the highest bidder above a minimum bid.
However, the delinquent owner will still maintain the right of redemption if they can repay the amount owed, plus interest and penalties, to the lien owner in time. This would prevent foreclosure, allowing the owner to keep the home.
Certificate of Purchase
The tax lien certificate is a legal document granting ownership of the lien to a specific person or entity. That party has the right to collect the debt from the property owner.
Tax liens are an investing strategy because the lien purchaser will either make money on their initial investment when the owner pays the debt and interest, or they will claim possession of a property for an incredibly low cost. If the property owner does not pay what they owe, the lien holder can initiate foreclosure after the deadline.
What is a Tax Deed?
A tax deed works quite differently from a tax lien certificate. A tax deed is a legal document that transfers ownership directly to the government or tax sale purchaser. It happens when there are delinquent property taxes on a home.
Tax Deed States
In tax deed sales, the property itself is sold rather than a lien on the property. This immediately transfers ownership to the purchaser rather than giving them a tax lien certificate that may or may not result in owning the property.
Tax deed states include Alaska, Arkansas, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Kansas, Maine, Massachusetts, Michigan, Nevada, New Mexico, New York, North Carolina, North Dakota, and Oklahoma. In many states, you can get a tax lien or tax deed.
The Process of a Tax Sale
Tax deed auctions start with a minimum bid and proceed until the highest bidder wins. Since the property itself is being sold in the tax deed process, in some cases, tax deeds transfer ownership immediately after the sale.
The starting price at tax deed sales usually equals the amount of back taxes according to the local taxing authority, interest, penalties, legal costs, and administrative charges. Tax deed investing is so profitable: a buyer can acquire a property for far less than its fair market value.
Redemption Rights
Some states offer a redemption period after a property deed is sold, during which the original owner can pay what is owed to maintain ownership of the home. However, this redemption period is very short, and some states don’t allow the original owner any time to reclaim their home once the sale is completed.
Key Differences
Whether you live in a tax deed state, a tax lien state, or one that offers both options, there are key differences between the two. As a homeowner, you should understand what may happen to your home if you fail to pay your property tax rates on time.
Ownership Transfer
In both scenarios, the process is initiated due to delinquent taxes. However, a tax lien sale sells a lien on the property rather than a deed of ownership. If the owner does not resolve the lien for taxes owed, the real estate investor can take possession of the home. In tax deed sales, ownership of the property is transferred immediately.
Redemption Rights and Timeframes
Tax liens are more forgiving with the redemption period. It is a built-in step in the process, allowing owners to repay their debt to the lien holders before losing their homes, which usually lasts several years.
In a tax deed state, the redemption period may be shorter, ranging from no time at all to six months. Some states will give property owners a few years to redeem tax deed sales.
Investor Involvement
Both sale methods are common for real estate investing. For tax lien investing, these individuals can purchase the liens and make money when the debt is paid or take possession of the home after the redemption period. Tax deed investors typically buy the deeds from the government once the government has taken ownership.
What You Should Know About Sales Tax and Distressed Properties
Distressed properties are homes that are in physical disrepair or have a tough financial situation. If you are a homeowner, it is essential to understand how distressed properties, tax liens, and tax deed sales work.
State Laws
States have different laws about the sales of tax liens or deeds. Some states may allow both options, while others offer one solution for property owners who do not pay taxes on time. You should research your state laws if you are facing outstanding taxes and aren’t sure what may happen to your home.
Professional Assistance With Taxes
If you are struggling with tax payments, working with a tax professional would be wise. You can ask for legal or financial advice about your tax lien or tax deed property and how to resolve the situation to keep your home.
Consider a Cash Sale
A fast cash sale is one way to avoid the threat of foreclosure and losing your home to the local taxing authority. Rather than worry about paying the owed taxes and penalties on time to maintain ownership, you can secure an offer from a cash home buyer who can close the deal before any foreclosure, tax lien, or tax deed deadlines hit.
A Fast and Simple Solution for Tax-Distressed Properties
Tax-distressed properties can put homeowners in danger of losing all their equity. If you must beat a property tax deadline, you can sell to A-List Properties for a fair cash offer. Our quick and hassle-free process allows homeowners to offload their properties quickly and prevent foreclosure or a tax deed sale.
Call us today at 972-526-7042 or complete the online form to request a fair cash offer.
Zach Shelley
Zach Shelley is a seasoned real estate investor with a diverse network spanning across the nation. As the founder of his own real estate venture, Zach is committed to offering innovative solutions to homeowners facing various real estate challenges.. Through his dedication and strategic approach, Zach continues to make a significant impact in the real estate industry, providing homeowners with alternative pathways to navigate their property transactions.
