Tax Lien Foreclosure Definition

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Tax Lien Foreclosure Definition

What Is a Tax Lien Foreclosure?

The sale of a property due to the inability of the property owner to pay their tax bills is known as tax lien foreclosure. When a property owner fails to pay the due taxes, including property taxes and federal and state income taxes, a tax lien foreclosure occurs.

Key Takeaways

  • If a property owner fails to pay property taxes, a tax lien foreclosure may occur.
  • The government handles overdue property taxes via tax lien foreclosures and tax deed sales.
  • In a tax deed sale, the property is auctioned off with a minimum bid of the taxes owing plus interest and other selling charges.

How a Tax Lien Foreclosure Works

A tax lien foreclosure is one of two options available to a government body to resolve outstanding taxes on property; the other is a tax deed sale. The property of the individual who has failed to pay taxes is initially encumbered by a statutory lien.

Tax liens, like property taxes and special assessment liens, may be particular liens against specific property. They may also be broad liens against the defaulting taxpayer’s whole property, as in the case of federal or state income tax liens.

The lien is represented by a tax lien certificate, which the state may sell to a trust or investor at public auction. Tax regulations prohibit the property’s owner (who has not paid their taxes) from bidding at the auction. Tax lien certificates earn a fixed rate of interest and are thus a potentially appealing investment since they are attached to a tangible asset, namely real estate. In Arizona, for example, investors may earn up to 16% annual interest on tax lien certificates.

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Redemption Period for a Tax Lien Foreclosure

In certain tax lien foreclosure cases, the property owner may be allowed a redemption period—a set amount of time during which the original owner may pay the debt and accompanying expenses. Interest and penalties accrue to the investor holding the tax lien certificate throughout the redemption term, which may be as little as three months or as long as three years. If and when the debt is resolved, the investor gets compensated for their investment plus accumulated interest and fees on the date of settlement.

The redemption period may begin before, or occasionally after, a foreclosure auction.

If all efforts to collect overdue taxes have been tried and the redemption time has expired, the lien holder may commence a court foreclosure case against the property itself. The court then orders a foreclosure auction to be arranged in order to collect the funds needed to settle the outstanding tax debt. In most cases, tax lien foreclosure processes culminate in the lien holder receiving the property.

Tax Lien Foreclosure vs. Tax Deed Sale

A tax deed sale may also be used to foreclose on a property. The property itself is sold in a tax deed sale. The minimum bid for an auction sale is the amount of past taxes owing, plus interest, as well as the fees connected with selling the property. Depending on the jurisdiction, any sum won by the successful bidder in excess of the minimum bid may or may not be reimbursed to the overdue owner.

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