What is a Tax Deed?

A tax deed sale is the forced sale, conducted by a governmental agency, of real estate for nonpayment of taxes. It is one of two methodologies used by governmental agencies to collect delinquent taxes owed on real estate, the other being the tax lien sale.

Tax Deed Sale Process

Real estate taxes are considered delinquent if not paid within a specified period of time. If the taxes are not paid, after legal requirements are met (such as giving proper notice to the property owner as well as others holding an interest in the property, or by filing required action in the courts), the property is offered for sale at a public auction. Before the property is offered for sale at auction, Jurisdictions such as Florida sell a Tax Lien Certificate on the property. A Tax Lien represents a lien of unpaid real estate taxes, assessments, including penalties, advertising costs and fees. If the property owner fails to pay the delinquent taxes during a specified period of time, the county government can sell what is called a Tax Lien Certificate on the property. The Tax Lien Certificate represents the outstanding taxes on the property. Many county governments sell the Tax Lien Certificates to investors so that the county may recoup the delinquent taxes. In exchange for the purchase, county governments offer the investors interest on those Tax Lien Certificates and the guarantee that those Tax Lien Certificates will be paid off within a predetermined period of time. Interest accrues on the Tax Lien Certificate over a specified course of time until the taxes are paid. A Tax Lien Certificate is a first position lien (Senior Lien) on the property. In most states, if the property owner does not redeem the Tax Lien Certificate within a specified time period the holder of the certificate can ask the county government to begin procedures to auction the property to the public. Proceeds from the auction will pay off the Tax Lien Certificate Holder.

The minimum bid is generally the amount of back taxes owed plus interest, as well as costs associated with selling the property. Bidding is done in increments from $10-$100 in most states. In the event the property is not purchased, title may revert to the government if a Tax Lien Certificate was not sold on the property. The government may then attempt to sell the property at a public auction and/or offer it for sale in a private transaction. If a Tax Lien Certificate was sold on the property, states like Florida will offer the property to the Tax Lien Certificate Holder. In that case the Tax Lien Certificate Holder will receive title to the property.

In most cases, the jurisdiction will only provide a quitclaim deed at the sale, which is usually insufficient for title insurance. Therefore, a “quiet title” action must be filed in court to obtain an insurable title.

Some jurisdictions allow a “redemption period”, whereby the former owner has a specified amount of time to reclaim the property by repaying the amount bid at auction plus a penalty. For example, Texas allows a 6-month period in most cases, with a flat 25% penalty to be added to the amount paid at sale (for agricultural and homestead property the period is 2 years and if redeemed in the second year the penalty is 50%), while Tennessee allows a full year, with a 10% penalty. As such, purchasers of properties at tax deed sales are cautioned not to make major improvements on the property until after the redemption period has expired.

Other jurisdictions do not allow a redemption period after sale (for example, Florida). However in Florida, the prior owner can still redeem the property by paying the delinquent taxes after the Tax Deed sale. In Florida this must be done before the Clerk of the Court signs the Tax Deed over to the new owner. The Clerk of Court signs the Tax Deed and records it in the public records under the name of the highest bidder once that bidder makes their final payment. The prior owner can still attempt to challenge the validity of the tax sale, for example by claiming that proper notice was not given.

What is a tax lien?

A tax lien is a lien imposed on property by law to secure payment of taxes. Tax liens may be imposed for delinquent taxes owed on real property or personal property, or as a result of failure to pay income taxes or other taxes.

Tax liens in connection with property taxes

Unlike personal debts, tax liens on real estate “run with the land”; that is, a property owner becomes responsible for payment even if the tax obligation was incurred by a prior owner. Depending on the law of the state or jurisdiction, the owner of the property may also be personally liable for payment of the taxes.

Payment of a tax lien may occur through various methods:

• Payment may be made directly by the property owner or, in many cases, indirectly by the mortgage holder using an escrow account. Notice is given both to the property owner and mortgage holder when a property tax is delinquent; thus, even if the property owner does not have an escrow account on the mortgage, the mortgage company will receive notice of the delinquency and may pay the tax. The mortgage company will then demand repayment from the owner/borrower and/or create an escrow account to recoup the proceeds, since the mortgage company might lose some of the value of its mortgage lien if the property were sold by the taxing agency to satisfy unpaid taxes foreclosure.
• If a property is sold by the owner prior to tax foreclosure by the government body, the tax lien (which is generally discovered as part of a title search) is usually paid as part of closing costs from the sale proceeds.
• Procedures vary from state to state. Generally, in the event a tax lien on personal property is not paid within a specified time (and after several notices are generally given), the property may be seized and sold at foreclosure sale. On real property, one of two methods may be used: either the property may be seized and sold (a tax deed sale), or in some States the tax lien may be offered to investors (in the form of a tax lien certificate) with an accompanying right for the investor, after a specified period of time, to institute foreclosure proceedings (a tax lien sale).