Tax Deed: Everything You Need To Know

Tax Deed: What Is It?

When a property owner does not pay any associated property taxes, a “tax deed” is a legal instrument that transfers ownership of the property to the government. A government agency has the right to sell the property in order to recover unpaid taxes thanks to a tax deed. The property is then transferred to the buyer after it is sold. These sales, which go by the name “tax deed sales,” are frequently done at auctions.

Key Aspects

• When a property owner doesn’t pay the related property taxes, a tax deed transfers title of the property to the government.
• Tax deeds are sold at auction to the highest bidder for a minimum price equal to the owed taxes plus interest and transaction fees.
• Winning bidders typically have 48 to 72 hours to complete the transaction after winning the auction.
• The total outstanding tax assessment is paid to the county at the conclusion of the auction, and the previous owner is given the net amount after taxes and penalties.
• Any sum paid to the municipality in excess of the amount of property taxes plus interest may be claimed back by property owners.

Tax Deed: Overview

Any tax paid on a piece of real estate is referred to as a property tax. Real estate owners are responsible for paying taxes, which are levied by the municipality where the property is located. It is implicitly acknowledged that real estate property owners are liable for paying property tax assessments.

The taxes gathered are used to finance a number of municipal initiatives, including the development of roads and highways, the improvement of water and sewer systems, the fire department and law enforcement, public employees, and other services. Every jurisdiction has a different property tax rate.

In order to collect overdue property taxes, the taxing authority may sell the property’s deed or title as well as the actual property itself. To obtain a tax deed, the taxing authority—typically a county government—must follow a set of legal procedures. Depending on local and municipal rules, these actions may also involve alerting the owner of the property, requesting a tax deed, placing a sign at the property, and publishing a public notice of the sale.

Tax Deed Sale: What Is It?

A tax deed sale involves the sale of the property and any related past-due property taxes. The property is sold at auction with a minimum bid equal to the amount of delinquent taxes, interest, and selling expenses that are outstanding. The highest bidder wins the property.

One need must be met by the buyer in order for the tax deed to legally transfer ownership to them: either they pay the full amount owed within 48 to 72 hours, or the sale is canceled. Any sum bid above the minimum price by the successful bidder may or may not be paid to the defaulting owner. Depending on the legal system.

If the original owner does not claim the surplus money within a certain amount of time, it may be forfeited. For instance, claims must be filed in California within a year, while the deadline in Texas is two years. In Georgia, money can be recovered from a tax deed sale up to five years later, at which point a court order is necessary.

Several states permit the original owner to pay off their tax debt and repurchase their property during this redemption period.

Some Special Considerations

While some states provide the successful bidder ownership on the same day as the tax deed sale auction, other states permit the original owner to redeem the property and pay off their tax debt during a redemption period. The successful bidder will receive the sum offered at the auction plus interest, which can be extremely considerable, if the owner decides to settle their debts within this time frame.

The highest bidder will have the opportunity to foreclose on the property, nevertheless, if the redemption period expires and the owner does not still claim their property deed. In Idaho, for instance, owners have 14 months to redeem their property, whereas in Iowa, they have one year and nine months to do so.

Tax Deeds Versus Tax Liens

Tax liens and tax deeds are similar, although there are a few minor variations. Tax liens are made against the property when the taxes are not paid, whereas tax deeds transfer title of the property to a new party. Tax liens offer investors a relatively low-cost investment with a guaranteed return. Simple interest accrues on liens every month and they can cost anywhere from a few hundred to a few thousand dollars.

If a property’s owner doesn’t pay their property taxes, a government agency puts a lien against the property, starting the lien process. Instead of selling the actual property, these liens, which prevent owners from doing anything with the property, including refinancing or selling it, are sold off at auction. By placing a bid, interested parties can purchase these tax liens. The return is based on the highest interest rate that the municipality permits.

The municipality notifies a property owner of the impending tax lien when they fall behind on their property payments. The tax lien is then put up for auction if the owner doesn’t pay the back taxes on time. The highest bidder receives the lien after paying the municipality’s outstanding tax balance. The property owner must pay the new lien owner the unpaid sum plus interest in order to satisfy the lien.

Auctions for foreclosures are normally held once a year. For instance, King County (Seattle, WA) will not see any foreclosures in 2022 until September 2023.

Tax Deed Sale Example

Let’s say a property is valued at $100,000 in a tax deed sale and owes $5,700 in unpaid taxes. $49,000 is the highest bid for the property.

The remaining money will be given to the original owner after the county deducts $5,700 to settle the unpaid property taxes. In this case, $43,300 ($49,000 – $5,700) goes to the original owner and $5,700 is given to the county.

The bidder gets title of the home and an equity profit of $100,000 – $49,000 = $51,000.

A Tax Deed And A Tax Lien: What Is the Difference?

A tax lien is a formal declaration that a certain party is entitled to the proceeds or value of a piece of property. Liens are all subsequent claims to value in an asset. A tax deed is the complete transmission of a property’s title as a result of unpaid property taxes.

How Do You Clear a Tax Deed?

A tax deed or tax deed sale originates due to unpaid property taxes. A tax deed will frequently become valid before the auction and stay with the original property owner if all tax debts are satisfied along with any related penalties, interest, and fees.

If You Do Not Pay Property Taxes, What Happens?

Property taxes are required by law if you own real estate and are approved by municipal government organizations. If you don’t pay your property taxes, the government has the power to take your home, claim the sale earnings, and transfer ownership to a new owner. Several governmental bodies have different regulations governing the tax deed process.