What Is a Tax Deed with an Example

Anbarasan Appavu
The term "tax deed" refers to a legal document that transfers property ownership to the government when the owner fails to pay property taxes. A tax deed authorizes the government agency to sell the property in order to collect delinquent taxes. Once a property is sold, it is transferred to the buyer. These transactions are referred to as "tax deed sales" and are typically conducted through auctions.
Tax Deed

• A tax deed transfers property ownership to a government entity when the owner fails to pay property taxes.

• Tax deeds are sold at auction to the highest bidder for a minimum bid of the outstanding taxes plus interest and sale costs. 

• Successful bidders have a minimum amount of time to pay for the purchase, typically 48 to 72 hours.

• The county receives the total delinquent tax assessment at the conclusion of the auction, while the former owner receives the net proceeds after taxes and penalties.

• Property owners may file a claim for any amount paid to the municipality in excess of property taxes and interest.

Understanding the Tax Deed

A property tax is any tax levied against real estate. Taxes are assessed by the local government of the property's location and paid by the property owners. There is a tacit understanding that property owners are responsible for paying property tax assessments.

The collected taxes are used to fund municipal programs such as water and sewer improvements, law enforcement and fire protection, education, road and highway construction, public servants, and other services. Tax rates on real estate vary by municipality.

When property taxes remain unpaid, the taxing authority may sell the property's deed or title, and thus the property itself, in order to collect the delinquent amount. In order to acquire a tax deed, the taxing authority — typically a county government — must complete a series of legal procedures. These steps include notifying the property owner, for applying the tax deed, posting notice at the property, and posting public notice of sale, depending on the local and municipal laws.

What Is Tax Deed Sale?

In a tax deed sale, the property and the delinquent property taxes associated with it are sold. The property is sold at auction with a minimum bid equal to the amount of delinquent taxes plus interest and the associated selling expenses. The winning bidder in this auction is always the highest bidder.

The tax deed legally transfers ownership to the buyer under one condition: the new owner must typically pay the entire amount owed within 48 to 72 hours or the sale is cancelled. Any amount bid in excess of the minimum by the successful bidder may or may not be remitted to the delinquent owner. This depends on the legal system.

This excess amount may be forfeited if the original owner does not claim it within a specified time frame. In California, claims must be filed within one year, whereas in Texas, the deadline is two years. In Georgia, excess funds can be retrieved up to five years after a tax deed sale, at which point a court order is required.

During the redemption period in some states, the original owner may repay their tax debt and reclaim their property.

Special Considerations

While some states sell the title to the highest bidder on the day of the tax deed sale auction, others provide an opportunity for the original owner to repay their tax debt and redeem the property during a redemption period. If the owner chooses to settle their debts within this time frame, they must pay the winning bidder the amount they won at auction plus interest, which can be quite high.

However, if the redemption period expires and the owner does not redeem the property deed, the highest bidder has the opportunity to foreclose. The redemption period in Idaho, for example, is fourteen months, while property owners in Iowa have one year and nine months.

Tax Deeds vs. Tax Liens

Tax liens and tax deeds are comparable, but there are subtle differences. In contrast to tax deeds, which transfer ownership of the property itself, tax liens are a legal claim against the property when taxes are not paid. Tax liens offer investors a relatively inexpensive investment with a guaranteed return. Liens can cost anywhere between a few hundred and a few thousand dollars and accrue simple monthly interest.

The lien process begins when a government entity places a lien on a property whose owner has failed to pay property taxes. These liens, which prohibit the owner from doing anything with the property, including refinancing or selling it, are auctioned off instead of the property itself. Bids can be submitted for these tax liens by interested parties. The return is determined by the maximum interest rate permitted by the municipality.

When a property owner fails to pay their property taxes, the municipality notifies them of the impending tax lien. If the owner fails to pay the delinquent taxes, the tax lien is auctioned off. The lien is transferred to the highest bidder, who pays the municipality the delinquent tax amount. To remove the lien, the property owner must pay the outstanding amount plus interest to the new lien holder.

Typically, foreclosure auctions are held once a year. In King County (Seattle, WA), 2022 foreclosures will not occur until September 2023.

Example of a Tax Deed Sale

Assume a property in a tax deed sale is valued at $90,000 and has $6,700 in delinquent taxes. The highest bid for the home is $59,000.

The county will deduct $6,700 from the winning bid to cover the outstanding property taxes, and the remaining funds will be paid to the original owner. In this instance, the county receives $6,700 and the original owner receives $52,300 ($59,000 - $6,700).

The winning bidder receives ownership of the property and a $31,000 equity profit ($90,000 - $59,000).

How Does a Tax Deed Differ from a Tax Lien?

A tax lien is a legal claim to the proceeds or value of a property. All liens are subordinate claims to the value of an asset. A tax deed is the complete conveyance of a property's title due to unpaid property taxes.

How Do I Clear a Tax Deed?

The origin of a tax deed or tax deed sale is unpaid property taxes. If all tax obligations are satisfied and associated penalties, interest, and fees are paid, a tax deed will typically clear prior to auction and the original property owner will retain ownership.

What Is the Consequence of Not Paying Property Taxes?

Property taxes are mandated by municipal governments and are a legal requirement for property ownership. If you do not pay your property taxes, the government has the right to seize your property, claim rights over the proceeds to cover their debts, and sell the property to a new owner. The regulations governing this tax deed procedure vary among government entities.

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