what is a tax deed
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A Tax Deed Might Be Able to Help You Buy a House at a Bargain

Danielle Letenyei - Author
By

Jan. 17 2023, Published 12:09 p.m. ET

The housing market may be slowing down, but home prices remain higher than many can afford, especially with the increased mortgage interest rates. But you may be able to buy a house at a bargain through what’s known as a tax deed.

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What exactly is a tax deed and how can it help you when purchasing a home? Keep reading for all the details and see if the document can help you.

What is a tax deed?

A tax deed is a document that turns over property ownership to the government if the owner doesn’t pay their property taxes. With a tax deed, the county government can take your property and sell it to help recoup delinquent property taxes.

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A tax deed
Source: Getty Images

Like it or not, taxes are a necessary part of owning property. The property taxes you pay are used by county and city governments to pay for services they provide through police and fire departments, public schools, public libraries, street departments, and more.

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Property taxes are collected once a year. The tax amount is based on a percentage of your property’s value, and that can vary depending on what state, county, and municipality you live in.

If you fail to pay your property tax for a certain amount of time, the local government can foreclose on your property. The number of years you can go without paying your property taxes before the property is foreclosed also varies by state.

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What is the difference between a tax deed and a tax lien?

Tax deeds are similar to tax liens in that both are ways for a government to collect unpaid property taxes. In some states, the tax lien is a municipality's first step to collecting delinquent property taxes. Once a lien is put on your property, you may have time to pay your outstanding property taxes before the government forecloses. This period could be a couple of months or years, depending on your state. If you try to sell a property with a tax lien, then money from the sale will go first to pay off the delinquent property taxes.

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Tax liens can be sold at public auction to investors. The tax lien investor will pay for the unpaid taxes but then can go after the property owner to collect the amount of the delinquent property taxes plus fees and interest.

When an investor buys a tax lien, they don’t get ownership of the property, just the right to collect past taxes. To obtain ownership of the property, an investor must buy the tax deed, which is sold at public auctions.

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What is a tax deed auction?

With a tax deed, the municipality sells the deed to your property at an auction and uses the proceeds from the sale to recoup the unpaid property taxes. In a tax deed sale, the ownership of the property is transferred to the auction’s highest bidder. Properties sold at tax deed auctions often sell at lower prices than they would get on the open market.

Hybrid states give property owners a redemption period.

Most states are either tax deed states or tax lien states, but there are about 12 that are considered “hybrid” states. In hybrid states, property owners may get a redemption period where they can keep their property by paying back the taxes and interest.

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