Tax Deed: A Definitive Guide

KEY TAKEAWAYS

• A tax deed is a type of legal document that gets issued if a property owner fails to pay their property taxes.
• Typically, tax deeds get issued to some type of governing body, which then collects delinquent taxes.
• Tax deeds are sold at auction to the highest bidder. Bids must be a minimum of any outstanding taxes plus interest.
• After a bidder is successful, they have up to 72 hours to pay for the property purchase.

What Is a Tax Deed? 

A tax deed is a type of legal document that gets issued if a property owner fails to pay their property taxes. Tax deeds are legal documents and they give ownership of a property to a specific government body when property taxes aren’t paid. 

Once the tax deed gets issued, the government agency has the authority to sell the property at an auction. If the property gets sold, delinquent taxes can get collected. Finally, the property gets transferred to a purchaser. This type of transaction is called a tax deed sale.

What Are Tax Deed Sales? 

Tax deed sales refer to the sale of a tax delinquent property. Sales take place at an auction and there must be a minimum bid of the total taxes owed, plus any outstanding interest. 

The sale also includes any additional costs that are associated with the property. Like the majority of auctions, the highest bid wins. 

Once someone purchases the property at the auction, the tax deed legally transfers ownership to the purchaser. The only condition the purchaser needs to meet is paying the entire amount owed at some point between 48 and 72 hours after the sale. If the entire amount is not paid, the sale gets canceled. 

Thet timings to make the payment can vary depending on the jurisdiction. The original property owner can also forfeit the excess amount if it’s not claimed within an outlined time period.

For example, claims in California must get filed within a year, whereas original owners in Texas can take up to two years after the tax deed sale is complete.

How Do Tax Deed Sales Work?

One of the first things to understand when it comes to tax deed sales is property taxes. These are any taxes that you would pay on real property. Taxes get determined by municipal governments, usually the county assessor’s or treasurer’s office,  that also receive tax payments from the owner of the real estate. 

It’s often up to the property owner to keep up with paying their property taxes. The taxes can be paid as part of the mortgage payment or directly to the municipal agency.

When property taxes don’t get paid—either on time or at all—tax authorities have the power to sell the deed or title to the property. When they do this they can then recover any outstanding taxes that haven’t been paid.

It often takes more than one missed property tax payment before the property gets auctioned.The property owner will also receive multiple notices informing them about the possibility of the auction. The owner has the ability to pay the back taxes until a certain date, which will take the property out of the auction.Some of the legal steps involved in a tax deed sale are listed below. The specific steps are going to vary depending on where you’re located and some of the municipal and local laws, they can include:

• Applying for the tax deed
• Notifying the property owner
• Posting a notice at the property 
• Posting a public notice where relevant or necessary
• Giving the current owner time to pay back taxes 
• Scheduling the auction

How to Invest in a Tax Deed Property 

The process of tax deed sales is going to vary depending on location. The first step you can take to invest in a tax deed property is researching or finding appropriate tax deed sales in your county. 

From here, all you need to do is find an auction that’s offering tax deeds and win the bid. Some of the auctions take place online, for others you have to be present at a specific location, usually in front of the court house. If you win the bid then you have a couple of options at your disposal for what to do with the property: 

• A Fix-And-Flip — With a fix-and-flip, you renovate the property and then sell it for an increased price, ultimately earning you a profit. 
• A Rental Property — Rental properties are often an excellent investment opportunity. If you turn your property into a rental, you can collect monthly payments from your tenants or renters. The property will continue to increase in value, at which point you could choose to sell. 
• As-Is Condition — If you’re not too concerned with renovating the new property or renting it out, you can always sell it immediately as-is. This means you won’t have to put any extra work into the property, but you can see a quicker return on investment.

What Is the Difference Between a Tax Lien and a Tax Deed? 

Tax liens and tax deeds can seem similar, but there are some differences worth highlighting. Tax liens are legal designations that state a party has the right to collect value or proceeds from an owned property. 

Tax deeds refer to the full title of a property getting transferred due to property tax delinquency. Here are some more differences:

• With a tax deed, an investor really buys the property because of a tax deed for unpaid real property taxes. This is opposed to a tax lien certificate, which only allows an investor to buy the right to collect taxes and lay a lien on a property.
• Before a property is qualified for auction through the tax deed application procedure, it typically goes through the tax lien certificate process.
• The controlling municipality will sell a tax lien certificate to an investor if someone is in arrears.

Summary

Tax deeds are legal documents that get issued when property owners fail to pay their property taxes on time. If this happens, the deed of the property goes to the local government body, which is often a county. 

The property is then sold at an auction. The minimum bid must cover any outstanding taxes, but the highest bid wins. Once the sale is final, the new owner can have anywhere between 48 to 72 hours to make the payment in full. If they don’t, the sale gets canceled. 

If the new owner makes the full payment on time, they can then choose what to do with the property. For example, they could renovate it and sell, rent it out as a rental property, or immediately sell it as-is.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.