DEFINITION of Tax Deed
A tax deed is a legal document that grants ownership of a property to a government body when the property owner does not pay the taxes due on the property. A tax deed gives the government the authority to sell the property to collect the delinquent taxes and transfer the property to the purchaser. Such sales are called "tax deed sales" and are usually held at auctions.
BREAKING DOWN Tax Deed
The owner of a property must pay taxes, assessed by a municipal government, on that property. The taxes collected are used to fund water and sewer improvements, provide law enforcement and fire service and finance education, road, and highway construction, public servants, and other services which benefit the community-at-large. Property tax rates and the types of properties taxed vary by jurisdiction. When property taxes are left unpaid, the taxing authority may sell the property’s deed or title to redeem taxes.
A tax deed legally transfers ownership to the buyer of a property that has been sold due to delinquent taxes. In order to acquire a tax deed, the taxing authority, often a county government, must go through a series of legal steps, including notifying the property owner, applying for a tax deed, posting a notice at the property, and posting a public notice. The exact steps that must be taken will vary in accordance with local and municipal laws.
In a tax deed sale, the property itself is sold. The sale which occurs through an auction has a minimum bid of the amount of back taxes owed plus interest, as well as costs associated with selling the property. The highest bidder takes title of the property, but has only about 48 to 72 hours to pay the entire amount owed, or else the sale is invalidated.
While some states will sell off title to the winning bidder the day of the tax deed sale auction, others will allow a redemption period during which the original owners have an opportunity to repay their tax debt and redeem the property. If the owner chooses to pay his debt obligations within this period, they must pay the winning bidder the amount bid at the auction plus interest, which can be pretty high. However, if the redemption period passes and the owner still does not reclaim his or her property deed, the highest bidder has a chance to foreclose on the property. For example, in Idaho the redemption period is 14 months, while in Iowa owners have one year and nine months to redeem their property.
Any amount bid by the winning bidder in excess of the minimum bid may or may not be remitted to the delinquent owner, depending on the jurisdiction. Also, the original owner may forfeit this excess amount if they do not claim it within a specified period of time. For example, in California claims must be filed within one year, while in Texas the deadline is two years. In Georgia, funds can be claimed up to five years after a tax deed sale, at which point a court order is required to retrieve excess funds.
Let's assume the value of a property in a tax deed sale is assessed to be $100,000 and has $5,700 in back taxes. The highest bid on the property is $49,000. The county will take $5,700 from the bid amount to cover the property taxes due, and the remainder will be paid to the original owner, that is, $49,000 - $5,700 = $43,300. After all, the government authority is only interested in recovering the taxes owed to it. The bidder gets title of the home and an equity profit of $100,000 - $49,000 = $51,000.