Tax Deed – Definition

Cite this article as:"Tax Deed – Definition," in The Business Professor, updated July 29, 2019, last accessed June 4, 2020, https://thebusinessprofessor.com/lesson/tax-deed-definition/.

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Tax Deed Definition

A tax deed is a legal instrument that grants property ownership to a government agency when the property owner defaults to paying taxes due on the property. In other words, it is a legal formal document that gives the government tax agency authority to sell of property such as a home so as to collect delinquent taxes and hand over the property to the buyer. Such transactions are known as tax deed sales and are usually done through auctions.

A Little More on What is a Tax Deed

Basically, the property owners have an obligation of paying taxes on their property as assessed by the municipal government. The collected taxes are used to fund various services/activities in the counties. The services included the following:

  • Financing education
  • Water and sewer improvement funding
  • Road and highway construction funding
  • Public servants funding
  • Law and enforcement funding
  • Fire services funding
  • Other services that are beneficial to the community

However, when property owners fail to pay their taxes, the tax authorities have a legal right to sell the property through auctioneering in order to redeem taxes. Note that the types of property to be taxed and their tax rates vary from one jurisdiction to the other.

Generally, tax deed provides a legal means of transferring ownership of the property from the owner to the buyer in case the owner fails to pay taxes on the property he or she owns. To get a tax deed, the county governing body with taxing authority need to go through several legal steps as stipulated in the local municipal law. These steps must be followed by the taxing authority before putting the property on auction.

The taxing authority must first notify the property owner about their intention to auction the property. Then, the authority will apply for a tax deed; post notice of property sale; and publishing a public notice of sale.

It is important to note that the specific legal steps involved in acquiring a tax deed, vary from one county to the other. This means that the local and municipal laws for each county, differ making tax deed acquisition procedure slightly different.

How Tax Deed Works

Tax deed involves the selling of property. The sale is usually through auction whose minimum bidding price amounts to the unpaid taxes, including their interests and costs incurred when selling the property. It is the highest bidder that acquires the ownership of the property. Note that the person who wins the bid is expected to make payment as soon as possible (usually within 48 to 72 hours). If not, then the sale tax authorities will have to invalidate the sale.

Also, where the bid amount surpasses the minimum bid, it may or may not be given to the person whose property has been auctioned. It all depends on the laws of the state in which the property is located. In a case where the law allows the excess amount to be given to the delinquent owner, then he or she is required to claim it within the specified period. If not, then he or she will have forfeited the excess amount.

Example

Let’s assume that in a tax deed sale, there is a property being auctioned is valued at $100,000 with a $5,700 in back taxes. On the other hand, the maximum bidding price of the property is $49,000. From the $49,000, the county government tax agency will take $5,700. This means that there will be a balance of $43,300 which is given to the original property owner. ($49,000 – $5,700 = $43,300). In this deal, the buyer will get the property’s ownership and equity as well as the equity profit of $51,000 ($100,000 – $49,000 = $51,000).

Note that the government’s interest in this whole process is to recover the taxes owed to it. That is why the excess has to be given away to the original owner. However, as explained earlier, whether or not the excess amount is given to the delinquent owner, it all depends on the laws of the state.

Steps Involved in Tax Deed Sales for Investors

In most cases, auctioning of the property is usually less the property’s actual value. This means that during property auctioning, the tax authority disregards the value of the property since their main aim is to only recover the unpaid taxes. and other interest including fee charges.

This move happens to attract investors. During auctioning, there is bidding on tax deeds by investors, and the highest bidder acquires the title of the property. To invest in tax deed sales, investors require that they follow certain basic steps. The steps are discussed below:

Step 1: Pick a location you want to invest in

In most states in the US, tax deed sales are carried out at the county level. Some states do their tax deed sales either quarterly or annually. You, therefore, need to decide the county you want to invest in as well as your timing preferences. You also need to put into consideration various factors such as the nearness of the property when deciding on the location. This is important because buying a property close to where you reside makes the management of the property easier.

Step 2: Find out more about the system

As said before, laws and rules of tax deed sales differ from one county to the other. For this reason, you need to have information on the requirements you need to meet when purchasing property in various locations.

Step 3: Get the property lists being auctioned

Ahead of tax deed auction, the authorized taxing government agencies usually publish lists of properties under auction. The lists can be availed to you upon request through your personal email. You can also access the lists through county tax collector’s websites where the lists are usually published. Note that it is important for you as an investor to learn more about the property listed for selling before investing in tax deeds.

Step 4: Research a bit about the properties

Since as an investor your main goal is to get hold of property that has the potential of giving you greater profits in the future, it is, therefore, important to do in-depth research about each property listed for auction. This will give you an opportunity to choose a property with such value. The county tax assessors should help you compare the prices listed for each property within the location you have chosen. You will also find it important to check the lifespan and quality of the property, including its size.

Step 5: Check on the liens

It is also essential that you find out about the properties’ lien status. Note that in some states, the tax deed laws allow the transfer of property ownership with pending mortgage lien including other tax liens. Some investors may prefer to purchase the property which has been cleared of all liens against it so that they have complete ownership of the property.

Step 6: Attend the auction

Note that if you need to acquire a tax deed, you need to attend and participate in the auction. It is, therefore, important that you find out when the auction will be taking place so that you can place your bid. Also, some auctions are performed online so you need to be well informed. Be present so that you can meet the set requirements for payment. Note that some counties require immediate payment while others will give you time to organize for payment. Whichever the case, you need to be there so that you find what is expected of you.

Step 7: Turn the Property to Profit

If you happened to win the bidding, you will be required to pay for the property and assume its ownership. The next thing will obviously be to decide how you want to use the property you have invested in. There are two possible options on how you can use the property:

  • First, you may decide to renovate the property and then sell it at a profitable price.
  • Secondly, you may consider renovating the property and then renting it out to a tenant.

Pros of Tax Deed

The auctioning of the property during tax deed sales is usually less the property’s actual value. This means that as a bidder, you will have an opportunity of acquiring the property at a considerably lower price, and he or she can then sell it later at a more valuable price.

Cons of Tax Deed

Since you are not allowed to inspect the interior of the property on auction, you may not know the inside condition of the property. For this reason, you might not be able to know the entire condition of the property you are buying.

Also, if the property has tax lien and the original owners still live there, there is a possibility that they may cause more damage to the property before living. This translates to additional repairing costs directed to the new owner.

References for “Tax Deed

 

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