What is a Tax Sale? Tax Deed and Tax Lien

[Kendall Bond]

What is a tax sale?

In the United States, anyone who owns property must pay some sort of real estate tax to the government. The taxes that are collected pay for public services, such as, hospitals, schools, law enforcement, road construction, parks and playgrounds. But, what happens if a property owner stops paying taxes? How does the county government recover this money to fund all of these services?

If a property owner does not pay the required taxes on a property, the county will offer the property up for sale at an auction as a "tax sale" to generate the lost tax income. There are two types of tax sales - tax lien sales and tax deed sales. In tax lien sales, the county government sells their right to the tax lien on the real estate property, allowing the buyer to bid on the tax debt for a favorable return on investment. In tax deed sales, the county government sells full ownership and possession rights of the property to the investor. Both can result in a flexible and secure investment with minimal market risk.

Tax Sale Defined further...

A transfer of real property in exchange for money to satisfy charges imposed thereupon by the government that have remained unpaid after the legal period for their payment has expired.

Tax sales are authorized by state statutes to collect taxes that are long overdue to the state government from negligent or unwilling individuals.

Requirements

Any sale of real property for delinquent taxes must be conducted in compliance with legally imposed requirements, or it is not valid. Ordinarily the tax collector is required to make and publish a list of property on which taxes have not been paid. Such a list must contain an adequate description of each parcel of land to be sold, the owner's name, the amount due, and the period of time for which the taxes are due. The interest permitted by law on the delinquent taxes, penalties for default in payment, and the costs incurred for the sale may be included in the amount due. Certain states mandate that this delinquency list must be filed or recorded in the office of the county clerk, and statutes may indicate specifically the newspapers in which the list is to be published.

Notice

The purpose of a notice of a tax sale is to warn the owner of the property that it will be sold and to furnish information to prospective buyers. Failure to provide notice to the owner renders any subsequent sale of the property invalid. This rule is consistent with due process requirements that any individual must be given notice and opportunity to defend himself or herself before being deprived of his or her property. The notice given to the owner must adequately describe the property, the amount of tax owed, and for what years it is due.

Manner

State statutes regulate the manner in which tax sales may be conducted. Ordinarily the sale is open to the public in order to ascertain that a fair price for the property will be obtained in the open market. A private sale is valid, however, when authorized by statute.

Price

The general rule is that land offered at a tax sale must bring at least the total amount of taxes due on it, plus legal costs and charges. In some jurisdictions, a sale for a smaller amount is invalid.

In the event that the land is sold at the tax sale for a price that exceeds the amount owed, the sale might be valid, depending upon the state; however, the excess must be given to the delinquent taxpayer.

Buyer

Any individual who is not disqualified by statute may purchase land at a tax sale provided he or she is the highest bidder. Upon payment of the amount bid, the buyer will be given a tax deed that serves as proof of his or her ownership of the property. Certain states mandate that a tax sale be confirmed in a court proceeding before the purchaser actually takes title or ownership to the property.

A state, county, Municipal Corporation, or other governmental unit may buy land sold at a tax sale only if authorized by statute.

Redemption

The owner of property that is the subject of a tax sale is given a statutory right of redemption—that is, if, within a certain period, the owner pays the back taxes plus any other legal charges due, he or she will regain complete ownership of the property free of the prior tax debt. The public policy behind such a statute is to provide the taxpayer with every reasonable opportunity to redeem property since Forfeiture of land has always been regarded as a drastic remedy. Generally any individual interested in the property sold for taxes is entitled to redeem it if his or her interest in the property will be affected by the purchaser taking complete ownership of the land, such as in the case of an individual who has a life estate in the property.

Redemption must occur within the time and in the manner specified by the State and/or County statute.