What Is a Tax Deed?

The term “tax deed” refers to a legal document granting ownership of a property to a government body when the owner fails to pay any associated property taxes.

A tax deed gives the government agency the authority to sell the property to collect the delinquent taxes. Once sold, the property is then transferred to the purchaser. These transactions are called tax deed sales and are usually held at auctions.

Understanding a Tax Deed

A property tax is any tax levied on a piece of real property. Taxes are assessed by the municipal government in which the property is located and paid by the owners of real estate. There is an implied understanding that owners of real estate property are responsible for paying property tax assessments.

The taxes collected are used to fund various municipal programs such as water and sewer improvements, law enforcement and fire service, education, road and highway construction, public servants, and other services. Property tax rates vary by jurisdiction.

When property taxes are left unpaid, the taxing authority may sell the property’s deed or title—and therefore, the property—to recover the outstanding taxes.

The taxing authority—usually a county government—must go through a series of legal steps in order to acquire a tax deed. These steps vary with local and municipal laws but include notifying the property owner, applying for the tax deed, posting a notice at the property, and posting a public notice of sale.

Tax Deed Sales

In a tax deed sale, the property with the associated delinquent property taxes is sold. The sale takes place through an auction with a minimum bid of the amount of back taxes owed, plus interest as well as costs associated with selling the property. The highest bidder wins the property. The tax deed legally transfers ownership to the purchaser on one condition: The new owner must pay the entire amount owed, often within 48 to 72 hours, or the sale is canceled. Any amount bid by the winning bidder in excess of the minimum bid may or may not be remitted to the delinquent owner. This depends on the jurisdiction.

The original owner may forfeit this excess amount if they do not claim it within a specified period of time. In California, for example, claims must be filed within one year, while the deadline in Texas is two years. In Georgia, funds can be claimed up to five years after a tax deed sale, at which point a court order is required to retrieve excess funds.

Special Considerations

While some states sell the title to the winning bidder the day of the tax deed sale auction, others will allow a redemption period during which the original owner has an opportunity to repay their tax debt and redeem the property. If the owner chooses to pay their debt obligations within this period, they must pay the winning bidder the amount bid at the auction plus interest, a total which can be quite high.

However, if the redemption period passes, and the owner still does not reclaim their property deed, the highest bidder has a chance to foreclose on the property.

The redemption period in Idaho, for example, is 14 months, while owners in Iowa have one year and nine months to redeem their property.

Tax Deeds vs. Tax Liens

Tax liens are similar to tax deeds, with some subtle differences. While tax deeds transfer ownership of the property itself to a new party, tax liens are a legal claim against the property when the taxes aren’t paid.

Tax liens provide a relatively cheap investment for investors with a guaranteed return. Liens can cost anywhere from a few hundred to a few thousand dollars and pay simple interest that accrues on a monthly basis.

The lien process begins when a government body places a lien against a property if its owner defaults on their property taxes. These liens prevent owners from doing anything with the property, including refinancing or selling it. They, rather than the property itself, are sold off at auction.

Interested parties can invest in these tax liens by bidding for them. The return is based on a maximum rate of interest allowed by the municipality. When a property owner defaults on their property taxes, the municipality sends a notice advising them of the upcoming tax lien. If the owner doesn’t bring the tax payments up to date, the tax lien is then put up for auction. The lien is transferred to the highest bidder, who pays the outstanding tax amount to the municipality. In order to remove the lien, the property owner must pay the new lien owner the outstanding amount plus interest.

Example of a Tax Deed Sale

Assume that the value of a property in a tax deed sale is assessed at $100,000 and has $5,700 in back taxes owed. The highest bid on the property is $49,000. The county will take $5,700 from the bid amount to cover the property taxes due, and the remainder will be paid to the original owner. So, $5,700 is remitted to the county and $43,300 ($49,000 - $5,700) is remitted to the original owner. The bidder gets title of the home and an equity profit of $100,000 - $49,000 = $51,000.

The Bottom Line

A tax deed is a legal document pertaining to real property ownership. It conveys that ownership to a government entity when the property owner fails to pay property taxes that are due. The government entity may sell the property deed via public auction to obtain the taxes owed, plus amounts for any interest and costs associated with the process. The auction winner then pays that total and takes legal possession of the property. The original owner may receive net proceeds above the amount for taxes, interest, and costs.