What Is a Tax Sale?

A tax sale is the sale of a real estate property that results when a taxpayer reaches a certain point of delinquency in his or her owed property tax payments.

Understanding Tax Sale

When a tax sale is triggered, the property owner has a right of redemption period. During this period, he or she has the opportunity to pay off the delinquent taxes in full and reclaim the property. If the property owner fails to pay the back taxes, along with any interest accrued, the property is then eligible to be sold at auction or through other means by a governmental entity.

In order for a tax sale to be valid, there are a number of laws and requirements that must be followed. The laws will vary based on which entity is requiring the taxes, whether it be local or state jurisdiction. In most areas, the basic requirement is that adequate notice must be given to the taxpayer to pay the outstanding taxes and any resulting sale must also usually be open to the public, so that an adequate price is obtained for the property. There is also usually a waiting period that ranges from several months to several years before tax collector agencies are involved. When the property does go to auction in a tax sale, the minimum bid price is usually set at 80% of the forced sale value of the property after subtracting any liens, based on the Fair Market Value determined by the IRS.

Types of Tax Sales

There are two types of tax sales that can occur when a property has unpaid property taxes. The first is a tax lien sale, and the second is a tax deed sale. In a tax lien sale, the liens on the home are auctioned off to the highest bidder, which gives the highest bidder the legal right to demand lien collection, along with interest, from the property or homeowner. In the event that the property owner is unable to pay the liens, the bidder who purchased the liens can have the property foreclosed. A tax deed sale, however, sells the entire property, unpaid taxes included, at a public auction.

Tax lien sales are both an incentive for the lien buyer to make money off of the interest of the lien and a way to force the property owner to pay the outstanding taxes. Tax lien sales are only legal in some states in the U.S., and each state has its own cap for the maximum amount of interest that the new lien owner can accrue in interest.