Tax Deed Definition

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Tax Deed Definition

What Is a Tax Deed?

A “tax deed” is a legal instrument that grants a government entity ownership of a property when the owner fails to pay any connected property taxes. A tax deed grants the government agency the ability to sell the property in order to collect back taxes. The property is transferred to the purchaser when it is sold. These transactions are known as “tax deed sales,” and they are often done at auctions.

Key Takeaways

  • When a property owner fails to pay the corresponding property taxes, a taxdeed gives title of the property to a government entity.
  • Tax deeds are auctioned off to the highest bidder for a minimum price of the unpaid taxes plus interest and selling expenses.
  • Successful bidders are normally given 48 to 72 hours to pay for their acquisition.
  • The county gets the whole outstanding tax assessment at the end of the auction, while the previous owner receives the net revenues after taxes and penalties.
  • Any sum paid to the municipality in excess of the property taxes plus interest may be claimed by property owners.

Understanding a Tax Deed

A property tax is any tax levied on real estate. Taxes are assessed by the municipality in where the property is situated and paid by the property owner. There is an assumed assumption that property owners are responsible for paying property tax assessments.

Municipal initiatives such as water and sewer upgrades, police enforcement and fire service, education, road and highway building, public employees, and other services are funded by the taxes collected. Property tax rates differ depending on where you live.

When property taxes are not paid, the taxing authority may auction the deed or title to the property—and hence the property—to recoup the unpaid taxes. To get a tax deed, the taxing authority—typically a county government—must go through a number of legal formalities. Notifying the property owner, applying for the tax deed, placing a notice at the property, and publishing a public notice of sale are all processes that must be taken, depending on local and municipal legislation.

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What Is a Tax Deed Sale?

The property with the related overdue property taxes is sold in a tax deed sale. The auction is held with a minimum bid of the amount of past taxes owing plus interest, as well as the expenses of selling the property. The property is won by the highest bidder.

The tax deed legally transfers title to the purchaser on the condition that the new owner pay the total amount owing within 48 to 72 hours, or the transaction is invalidated. Any sum offered in excess of the minimum price by the successful bidder may or may not be reimbursed to the overdue owner. This is determined by the jurisdiction.

If the original owner does not claim the extra amount within a certain time frame, they may lose it. In California, for example, claims must be submitted within one year, but Texas has a two-year limit. In Georgia, monies may be claimed for up to five years following a tax deed sale, after which a court order is necessary to reclaim any remaining cash.

Some jurisdictions allow the original owner to repay their tax obligation and reclaim their previous property during a redemption period.

Special Considerations

While some states sell the title to the highest bidder on the day of the tax deed sale auction, others offer the original owner a redemption period during which they may satisfy their tax obligation and redeem the property. If the owner decides to pay off their debts within this time frame, they must pay the successful bidder the sum won at the auction plus interest, which may be extremely significant.

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If the redemption time expires and the owner does not recover their property deed, the highest bidder may foreclose on the property. In Idaho, for example, the redemption time is 14 months, but property owners in Iowa have one year and nine months to redeem their land.

Tax Deeds vs. Tax Liens

Tax liens and tax deeds are similar, although there are some small variances. Tax deeds transfer title of the property to a new party, while tax liens are a legal claim made against the property when taxes are not paid. Tax liens are a low-cost investment with a guaranteed return for investors. Liens may range in price from a few hundred to a few thousand dollars, and they pay basic interest on a monthly basis.

If a property owner fails to pay their property taxes, the government will put a lien on the property. These liens, which restrict owners from doing anything with the property, including refinancing or selling it, are auctioned off instead of the property itself. Bidding for these tax liens allows interested parties to invest in them. The return is calculated using the municipality’s maximum interest rate.

When a property owner falls behind on their property taxes, the municipality notifies them of the impending tax lien. If the owner does not pay the taxes on time, the tax lien is auctioned off. The lien is transferred to the highest bidder, who pays the municipality the overdue tax amount. To eliminate the lien, the property owner must pay the outstanding sum plus interest to the new lien owner.

Foreclosure auctions are usually held once a year. For example, in King County (Seattle, WA), foreclosures will not commence until September 2023.

Example of a Tax Deed Sale

Assume the valuation of a property in a tax deed sale is $100,000 and there are $5,700 in outstanding taxes. The property has received the highest offer of $49,000.

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The county will deduct $5,700 from the bid amount to satisfy the outstanding property taxes, with the remaining going to the original owner. In this case, the county receives $5,700, while the original owner receives $43,300 ($49,000 – $5,700).

The bidder receives ownership of the house as well as 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 classification indicating that one party has the right to collect the profits or value of a property. All liens are later claims on the value of an asset. A tax deed is the complete transfer of a property’s title owing to delinquent property taxes.

How Do I Clear a Tax Deed?

Unpaid property taxes result in a tax deed or tax deed sale. A tax deed will frequently clear before to auction and stay with the original property owner if all tax liabilities are cleared and related fines, interest, and fees are paid.

What Happens If I Do Not Pay Property Taxes?

Property taxes are mandated by local governments and are a legal requirement for property owners. By failing to pay property taxes, the government has the authority to take your property, claim rights over the revenues to meet unpaid obligations, and sell the property to a new owner. The regulations governing this tax deed procedure differ depending on the government entity.

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