What Is a Tax Deed?
A tax deed is a legal document that bestows ownership of a property to a government authority when the property owner neglects to pay the associated property taxes.
This deed grants the government the prerogative to sell the property to recoup the delinquent taxes. These properties are typically sold during tax deed sales held at auctions.
Key Takeaways
- A tax deed grants property ownership to a government authority in cases of unpaid property taxes.
- Tax deeds are auctioned to the highest bidder with a minimum bid of the outstanding taxes, plus interest and sales expenses.
- Successful bidders generally have a minimum window to finalize payment—usually 48 to 72 hours.
- At auction close, the municipality retrieves the total unpaid tax amount, with any surplus proceeds possibly going to the original owner after taxes and penalties.
- Property owners may file a claim for any excess amount paid to the municipality beyond the property taxes and interest dues.
Understanding a Tax Deed
Property taxes fund essential municipal programs such as water and sewer services, law enforcement, education, roadworks, and other public services. Tax rates may vary significantly by jurisdiction.
If property taxes remain outstanding, the taxing authority can sell the property’s deed or title to settle the unpaid taxes.
The taxing authority must follow specific legal steps to acquire a tax deed, which may vary by locality. These include notifying the property owner, applying for the tax deed, posting a sale notice at the property, and publishing a public notice of sale.
Tax Deed Sales
In a tax deed sale, properties with outstanding property taxes are auctioned off with a starting bid covering the unpaid taxes plus interest and additional sales costs. The highest bidder secures the property.
The tax deed transfers ownership to the purchaser, who must pay the full amount, typically within 48 to 72 hours. If the highest bid exceeds the minimum bid, the remaining amount may go to the past owner depending on local regulations.
If the original owner fails to claim this excess within a stipulated period, they forfeit the amount. This period varies by state, such as one year in California, two years in Texas, and up to five years in Georgia.
Special Considerations
Some states offer a redemption period, giving the original owner a chance to reclaim their property by settling the tax debt plus interest. If failing to do so, the winning bidder may foreclose the property.
Tax Deeds vs. Tax Liens
Tax liens, unlike tax deeds that transfer property ownership, are claims against the property for unpaid taxes. They are more affordable and offer a guaranteed simple interest investment.
Government authorities place tax liens on default properties, barring owners from refining or selling them. The liens are auctioned, with the highest bidder receiving the rights to collect the outstanding tax amount plus interest. Property owners must pay this amount to clear the lien.
Example of a Tax Deed Sale
Consider a property valued at $100,000 with $5,700 in unpaid taxes sold in a tax deed sale for $49,000. The county collects the $5,700 tax from the sale amount, and the original owner gets $43,300, the surplus amount. The new titleholder also acquires an equity profit of $51,000 ($100,000 - $49,000).
Differences Between Tax Deeds and Tax Liens
A tax deed fully transfers the property title due to unpaid property taxes, while a tax lien is merely a legal claim to collect proceedings from a property. All liens are secondary rights to receive value from an asset.
Clearing a Tax Deed
If a property owner settles all tax obligations, penalties, and interest accrues prior to the auction, the tax deed can be cleared, maintaining the property ownership.
Consequences of Unpaid Property Taxes
Property taxes are legal obligations managed by municipal entities. Unpaid taxes may prompt the government to seize and sell the property to meet the tax duties owed. These regulations differ by government authority.
The Bottom Line
A tax deed legally conveys ownership of real property to a government entity when property taxes fall behind. The government can auction off the property to reclaim the taxes, interest, and associated costs, transferring ownership to the highest bidder and potentially rewarding the original owner with any surplus proceeds.
Related Terms: tax lien, foreclosure, property auction.
References
- National Association of Realtors. “Property Taxes”.
- California State Controller. “County Tax Collectors’ Reference Manual - Chapter 8000: Sale of Tax-Defaulted Property”, Page 52.
- Texas Constitution and Statutes. “Title 1. Property Tax Code. Subtitle E. Collections and Delinquency. Chapter 34. Tax Sales and Redemption. Subchapter A. Tax Sales”.
- Justia. “O.C.G.A. 48-4-5 (2010) 48-4-5. Payment of excess”.
- Iowa Legislature. “Tax Redemption, §447.9”, Page 1.
- Idaho Legislature. “Idaho Code Sec 63-1007. Redemption - Expiration of right”.
- King County. “Foreclosure Auctions and Information.”
