Tax Deed States Explained
Real estate investing can be complex, particularly when dealing with tax deed states. Certain states allow the government to sell properties due to unpaid taxes, offering both opportunities and risks for investors.
In this article, we’ll explore what tax deed states are, how they work, and what investors need to know to navigate this niche market effectively.
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What is a tax deed?
Homeowners must pay property taxes on any properties they purchase, and if they fail to do so, a taxing authority may be granted ownership. The legal document that determines this ownership is known as a tax deed.
The municipality is then entitled to sell the property, allowing them to make up the funds from the unpaid taxes. This process is known as a tax deed sale, and is generally done through auctions. The new buyer will then own the property in question.
Understanding tax deed states
The property taxes that owners are required to pay are generally used for various municipal services such as:
- Water
- Law enforcement
- Fire service
- Sewage improvements
- Road construction
- Education
The taxes that owners must pay vary between different jurisdictions. When these go unpaid, the taxing authority needs to go through various steps, which also vary between different jurisdictions. Generally, this involves notifying the owner, applying for the deed, then posting a notice at the property, as well as a public notice of sale.
Tax deed sales
A tax deed sale is a process that a taxing authority goes through when selling a house. This is most often done at an auction. There’s a minimum bid that covers the taxes owed plus interest, as well as additional costs for the sales process.
The tax deed will transfer ownership of the property to the highest bidder. The new owner needs to provide payment within 48-72 hours for the sale to be valid.
In some cases, the previous owner may receive some money back if the final amount of the purchase is over the minimum bid. When this happens, they need to claim this amount within a certain period, otherwise, they will lose it.
In some states, the delinquent owner may be able to pay off their tax debt and have the ownership returned to them. This needs to be done within a stated period, and failing to do so means the new owner can foreclose on the property.
Redemption periods
When someone purchases a tax deed, they don’t immediately become the owner. In some cases, the person who has defaulted may be able to retain ownership, thanks to redemption periods.
A redemption period lasts for a set time after a tax deed is sold. During this time, the original owner still has the opportunity to pay off the taxes they owe with interest. If they manage to do so, they’ll retain ownership of the property.
It’s worth bearing in mind that the owner isn’t the only individual who can pay these taxes off during a redemption period. Anyone who has a legal interest in the property can choose to do so. A typical example of this might be a mortgage company that wants to stop the sale.
The investor who purchased the tax deed won’t lose any money, but the investment opportunity will be gone. Note that rules on redemption periods vary between different states. In some, they are as short as 6 months, and in others, they can be up to 4 years.
Which states are tax deed states?
A tax deed state is one in which the public can buy and sell tax deeds. All of the following states fall into this category:
- Alaska
- Arkansas
- California
- Connecticut
- Delaware
- Georgia
- Hawaii
- Idaho
- Kansas
- Maine
- Michigan
- Missouri
- Nevada
- New Hampshire
- New Mexico
- New York
- North Carolina
- North Dakota
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- South Dakota
- Tennessee
- Texas
- Utah
- Virginia
- Washington
- Wisconsin
Tax deeds are sometimes confused with tax liens, but there are some differences between the two.
Tax deed states vs tax liens
Tax liens work differently to tax deeds. Rather than transferring ownership of a property to a new owner, tax liens are produced when taxes are unpaid as a legal claim against the property. This presents a cheap investment opportunity that guarantees a return.
They can sometimes cost just a few hundred dollars if the property is small. In most cases, however, a tax lien will be far more expensive. Note that this cost will be made up of the taxes owed, as well as interest.
When an owner defaults on a property, their taxing authority will give them a notice regarding the tax lien. The owner will then be unable to sell or refinance the property.
Like a tax deed, a tax lien will be auctioned to the highest bidder. The winner will pay the outstanding taxes. The owner must then pay back the full amount to them, with interest.
Rights of tax lien property owners
When someone buys a tax lien certificate, they don’t gain immediate ownership of the property in question. As a lien doesn’t transfer home ownership, the buyer can take control of any properties, or evict the owners.
There’s a redemption period, similar to a tax deed. The owner can stay in the house throughout this. The redemption period gives them time to pay back the tax lien investor the amount of the taxes, along with interest.
Rights of tax lien purchasers
A tax lien purchaser can enforce the certificates during the redemption period. By doing so, they’re able to collect the taxes they’re owed from the property owner.
If they fail to pay off the owed amount during this time, the lien investor can then file a petition. A court may allow them to foreclose on the property. They are then free to either evict the owner and claim the title, or to sell the property at auction.
Tax lien certificate states
Almost all states are either tax deed or tax lien states. In tax lien states, tax liens are typically seen as an opportunity for investors to make reliable profits through the interest that homeowners are required to pay. There may also be additional penalties or court fees that are needed to remove the lien.
The following are considered tax lien states:
- Alabama
- Arizona
- Colorado
- Florida
- Illinois
- Indiana
- Iowa
- Kentucky
- Maryland
- Mississippi
- Missouri
- Montana
- Nebraska
- New Jersey
- North Dakota
- Ohio
- Oklahoma
- South Carolina
- South Dakota
- Vermont
- West Virginia
- Wyoming
Investors in tax deed states don’t purchase tax deeds to directly generate income but as an inexpensive way of buying different types of properties. Sometimes investors will sell these houses for a profit or retain ownership so that they can generate regular income from them.
Hybrid states
The following are all hybrid states:
- Connecticut
- Delaware
- Florida
- Georgia
- Hawaii
- Louisiana
- Massachusetts
- Ohio
- Pennsylvania
- Rhode Island
- Tennessee
- Texas
While most states are either tax deed or tax lien states, some aren’t specifically in either category. These are hybrid statesa, and they’re similar to tax deed states, but with one main difference.
In a hybrid state, an investor can buy a tax deed by paying off the outstanding taxes along with interest. Property owners still have a chance to buy their property back, however, during the redemption period. They can do this by paying back the delinquent taxes and interest themselves.
What if you’re looking to sell?
People living in tax deed states may be able to attend tax deed auctions and find some cheap property-buying opportunities. Those in tax lien states won’t be able to purchase homes in the same way, but can still make good investments from tax lien purchases.
Losing a property as a result of not being able to pay the appropriate taxes is never ideal. Selling a home at the right time, however, can be very financially rewarding. Unfortunately, the process tends to be quite long and difficult.
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