Tax Deed

What Is a Tax Deed?

The term “tax deed” refers to a legal document granting ownership of a property to a government body when the owner fails to pay any associated property taxes. A tax deed gives the government agency the authority to sell the property to collect the delinquent taxes. Once sold, the property is then transferred to the purchaser. These transactions are called “tax deed sales” and are usually held at auctions.

Key Takeaways

  • A tax deed grants ownership of a property to a government body when the owner fails to pay the associated property taxes.
  • Tax deeds are sold to the highest bidder at auction for a minimum bid of the outstanding taxes plus interest and the costs associated with the sale.
  • Successful bidders have a minimum amount of time to pay for the purchase—usually 48 to 72 hours.
  • At the close of the auction, the county receives the total delinquent tax assessment, and the former owner receives the net proceeds after taxes and penalties.
  • Property owners may file a claim to receive any amount paid to the municipality in excess of the property taxes plus interest.

Understanding a Tax Deed

A property tax is any tax paid on a piece of real property. Taxes are assessed by the municipal government in which the property is located and paid by the owners of real estate. There is implied understanding that owners of real estate property are responsible for paying property tax assessments.

The taxes collected are used to fund various municipal programs such as water and sewer improvements, law enforcement and fire service, education, road and highway construction, public servants, and other services. Property tax rates vary by jurisdiction.

When property taxes are left unpaid, the taxing authority may sell the property’s deed or title—and therefore, the property—to recover the outstanding taxes. The taxing authority—usually a county government—must go through a series of legal steps in order to acquire a tax deed. These steps vary with local and municipal laws but include notifying the property owner, applying for the tax deed, posting a notice at the property, and posting a public notice of sale.

What Is a Tax Deed Sale?

In a tax deed sale, the property with the associated delinquent property taxes is sold. The sale takes place through an auction with a minimum bid of the amount of back taxes owed plus interest, as well as costs associated with selling the property. The highest bidder wins the property.

The tax deed legally transfers ownership to the purchaser on one condition: The new owner must often pay the entire amount owed within 48 to 72 hours, or the sale is canceled. Any amount bid by the winning bidder in excess of the minimum bid may or may not be remitted to the delinquent owner. This depends on the jurisdiction.

The original owner may forfeit this excess amount if they do not claim it within a specified period of time. In California, for example, claims must be filed within one year, while the deadline in Texas 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.

Some states have a redemption period during which the original owner may pay back their tax debt and reacquire their former property.

Special Considerations

While some states sell the title to the winning bidder the day of the tax deed sale auction, others will allow a redemption period during which the original owner has an opportunity to repay their tax debt and redeem the property. If the owner chooses to pay their debt obligations within this period, they must pay the winning bidder the amount bid at the auction plus interest, which can be quite high.

However, if the redemption period passes, and the owner still does not reclaim their property deed, the highest bidder has a chance to foreclose on the property. The redemption period in Idaho, for example, is 14 months, while owners in Iowa have one year and nine months to redeem their property.

Tax Deeds vs. Tax Liens

Tax liens are similar to tax deeds, but there are some subtle differences. While tax deeds transfer ownership of the property itself to a new party, tax liens are a legal claim against the property when the taxes aren’t paid. Tax liens provide a relatively cheap investment for investors with a guaranteed return. Liens can cost anywhere from a few hundred to a few thousand dollars and pay simple interest that accrues on a monthly basis.

The lien process begins government body places a lien against a property if its owner defaults on their property taxes. These liens, which prevent owners from doing anything with the property, including refinancing or selling it, are sold off at auction rather than the property itself. Interested parties can invest in these tax liens by bidding for them. The return is based on a maximum rate of interest allowed by the municipality.

When a property owner defaults on their property, the municipality sends a notice advising them of the upcoming tax lien. If the owner doesn’t bring the taxes up to date, the tax lien is then put up for auction. The lien is transferred to the highest bidder, who pays the outstanding tax amount to the municipality. In order to remove the lien, the property owner must pay the new lien owner the outstanding amount plus interest.

Foreclosure auctions are typically conducted once a year. For example, 2022 foreclosures in King County (Seattle, WA) will not occur until September 2023.

Example of a Tax Deed Sale

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. In this example, $5,700 is remit to the county and $43,300 ($49,000 - $5,700) is remit to the original owner.

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

What Is the Difference Between a Tax Deed and Tax Lien?

A tax lien is a legal designation that one party has rights to collect proceeds or value from a property. All liens are subsequent rights to receive value from an asset. A tax deed is the full transmittal of the title of a property due to property tax delinquency.

How Do I Clear a Tax Deed?

A tax deed or tax deed sale arises due to unpaid property taxes. If all tax obligations are cleared and associated penalties, interest, and fees are paid, a tax deed will often clear prior to auction and remain with the original property owner.

What Happens If I Do Not Pay Property Taxes?

Property taxes are sanctioned by municipal government bodies and are legal obligations for owning real estate. By not paying property taxes, the government has the right to seize your property, claim rights over proceeds to cover their owed obligations and dispose of a property to a new owner. The rules around this tax deed process varies between government entities.

Article Sources
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  1. California State Controller. "County Tax Collectors’ Reference Manual - Chapter 8000: Sale of Tax-Defaulted Property." Pages 52 and 53.

  2. Texas Constitution and Statutes. "Title 1. Property Tax Code. Subtitle E. Collections and Delinquency. Chapter 34. Tax Sales and Redemption. Subchapter A. Tax Sales."

  3. Justia. "O.C.G.A. 48-4-5 (2010) 48-4-5. Payment of excess."

  4. Idaho Legislature. "Idaho Code Sec 63-1007. Redemption - Expiration of right."

  5. Justia. "IA Code Sec 447.9 (2014): Notice of expiration of right of redemption - county right of redemption."

  6. King County. "2022 Foreclosure Auction."

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