Tax Lien Foreclosure: What Is It?
The sale of a property as a result of the owner’s failure to satisfy their tax obligations is known as a tax lien foreclosure. When a property owner fails to pay the necessary taxes, such as property taxes and federal, state, and local income taxes, a tax lien foreclosure takes place.
Key Aspects
- A tax lien foreclosure may occur if a property owner does not pay the property’s taxes.
- Tax lien foreclosures and tax deed sales are two ways that the government handles unpaid property taxes.
- At a tax deed sale, the property is auctioned off with a minimum bid equal to the taxes owed, plus interest and any selling expenses.
How Does Tax Lien Foreclosure Work?
One of two options available to a government agency to deal with unpaid taxes on a property is a tax lien foreclosure; the other option is a tax deed sale. First, the owner of the unpaid taxes has a statutory lien put on their property.
Tax liens can be particular liens placed on particular property, such as special assessment and property tax liens. In the case of federal or state income tax liens, they may also be general liens against all of the taxpayer’s property.
A tax lien certificate that represents the lien may be sold by the state to a trust or investor at a public auction. Tax laws prohibit the property’s owner from participating in the auction since they did not pay their taxes. As tax lien certificates are linked to a concrete asset, namely real estate, they may be an appealing investment because they accrue interest at a defined rate. For instance, Arizona allows investors to earn up to 16% annually on a tax lien certificate.
Tax Lien Foreclosure Redemption Period
A redemption period, or time period during which the original owner has the chance to settle the lien and additional expenses, may occasionally be provided to the property owner in tax lien foreclosure proceedings. Interest and penalties are charged to the investor holding the tax lien certificate during the redemption period, which may last three months or three years. The investor is paid back their investment plus accrued interest and fees on the settlement date, if and when the debt is settled.
The redemption period may begin before to a foreclosure auction or occasionally after one has taken place.
The lien holder may begin a judicial foreclosure action against the property itself if all efforts to recover past-due taxes have been made ineffective and the redemption term has passed. Thereafter, the court mandates that a foreclosure auction be arranged to raise the funds necessary to pay off the outstanding tax lien. In most cases, the property is acquired by the lien holder following the tax lien foreclosure process.
Tax Lien Foreclosure Versus Tax Deed Sale
Foreclosing against the property may also be done through a tax deed sale. A tax deed sale involves the actual sale of the property. The minimum bid for an auction sale is equal to the amount of overdue taxes, interest, and selling expenses that are owed, plus those fees. Depending on the jurisdiction, any sum bid by the successful bidder above the minimum price may or may not be paid to the defaulting owner.