Tax Liens & Tax Deeds

Homeowners are subject to property taxes.

The federal government imposes taxes on virtually everyone living and working in the United States. Additionally, each state and local municipalities charge taxes to property owners. Failure to pay taxes at any level of government can cause harm to your credit score, or result in the loss of your home and other possessions. Depending on the state in which the property is located, a tax lien or a tax deed may be purchased by a third party who then holds a right to the property in question.

Function

A tax lien can be filed against someone when they fail to pay property taxes. Having a lien against your name may prevent you from applying for credit or loans. Liens of any kind, act as a collection method for past-due balances and as a red flag to potential creditors and employers. Each state and county determines the amount of time that will pass before a tax bill becomes delinquent. Once delinquency occurs, the party owed money proceeds to file a lien. When the homeowner receives the lien notice via mail, he generally has about 10 days to pay the amount due. If the amount is not paid, a tax lien or tax deed sale can occur depending on the state of residency. The tax lien or deed is then placed up for sale at a public auction.

Features

At the auction, the highest bidder wins the right to purchase the lien at a certain interest rate. If the homeowner repays the delinquent taxes, the bidder will be repaid the amount of the tax lien, plus the interest rate locked in at the auction. After a certain number of years, three to five, if the homeowner has not paid the taxes the bidder can foreclose on the property. Foreclosure proceedings will then follow and the bidder will be able to acquire the property.

State Laws

Each state has rules and regulations regarding tax sales. Tax liens and tax deeds are essentially one in the same. The name is different depending on what state you are dealing with. Laws differ mostly in the time frame of delinquency and filing the lien or deed and the time frame the home owners have to repay their debt until foreclosure. Additionally, some states require certain forms of advertising the sale to the public.

Considerations

The sale of tax liens and tax deeds have the potential to earn a return on the initial investment. If the debt is paid, the investor earns interest on that amount. On the other hand, if the debt is not paid the investor can claim the property through foreclosure and then sell it outright. If you are considering an investment in a tax sale, fully research the property before placing a bid at the auction. In some cases, the properties are condemned and will be worth very little.

Prevention/Solution

To prevent a tax lien being filed, you should always pay property and local municipality taxes when due. Setting up an escrow account with your mortgage company can eliminate the burden of multiple tax payments. The mortgage company uses funds in your escrow account to pay taxes when they become due. You pay the mortgage company directly in addition to the monthly mortgage payment and they set aside the funds for this purpose. The federal government can also place a lien against your property if federal income taxes are not paid. However, this lien cannot be bought at auction the way a property tax lien can.

References

• Real Estate For You: How Do Tax liens or Tax Deed Sales Work?
• IRS Attorney: More About Tax Lien
• Foreclosure.com: Tax Deed Sales