A property deed is a real estate legal document, which transfers the ownership of real property, such as land and items attached to it, or a building, from a seller (the grantor) to a buyer (the grantee). A valid deed is a written document that clearly identifies the grantor and grantee as well as the property that is the subject of the deed.
To be valid, the language of the deed must clearly convey the grantor's intent to transfer the property the grantee.The intent is further conveyed by the signature of the person who transfers the land, which is certified by a notary public. This process, however, can be interrupted if a taxpayer fails to pay taxes on the property, a situation that can result in the issuance of both a tax lien and a tax deed.
What Is a Tax Lien?
A tax lien is a claim made by a local or municipal government on real property if the property's owner fails to pay a property tax liability. In effect, when a tax lien is placed on a property, that property becomes collateral for the tax liability. Thus, a tax lien is an "involuntary lien" because the government entity does not require a property owner's consent to enact the lien.
The lien is a legal claim against the property, and a tax lien certificate denotes the taxes owed on the property as well as the accumulated interest on that debt and the amount of any related penalties. The owner of a property with a lien attached to it can't sell or refinance the property until the taxes are paid and the lien is removed. Typically, a tax lien is issued prior to a tax levy, whereby the Internal Revenue Service (IRS) or a local or municipal government seizes a taxpayer's property to recover the debt.
What Is a Tax Levy?
A tax levy is the legal seizure of your property to satisfy a tax debt. Whereas a lien imposes a legal claim against a property to secure the payment of a tax debt, a levy actually takes the property to satisfy the tax debt.
A government agency, including the IRS, may have the right to levy any property or the right to a property that a taxpayer owns, whether (or not) a lien has been issued for the property.
What Is a Tax Deed?
A tax deed is a legal document that transfers the ownership of a property to a government entity if the property's owner fails to pay the property taxes that are assessed on the property's value. The tax deed gives the relevant government agency the authority to sell the property and use the sale's proceeds to settle the delinquent taxes.
Upon its sale, the property's ownership transfers to the buyer. This transactions is referred to as a “tax deed sale.” Typically these sales take place as auctions.
The Purchase of a Tax Lien
Generally, when taxes remain unpaid, the taxing authority will sell the related tax lien. If the taxpayer fails to pay the past-due taxes to the lien purchaser, that buyer can foreclose or use another method to obtain the title to the property. Alternatively, the buyer can sell the property in a tax sale.
Property Tax Lien Investment
Property tax liens is an investment niche for those seeking a decent rate of return. But this investment opportunity can carry substantial risk, so the tax lien buyers should learn about the opportunity and its pitfalls before investing.
Buying a Tax Lien
The tax lien certificate, which documents the taxes owed on the property, plus any interest or penalties due, is auctioned off in an in-person or online buyer-bid auction. When this type of auction occurs, the highest bidder takes ownership of the tax lien at the bid price.
The Tax Lien Auction
- Identify the Property Type: A first step in buying a tax lien is identifying the property type of interest: residential, commercial, undeveloped land or property with improvements.
- Contact the Treasurer's Office: Next, a potential buyer contacts the city or county treasurer's office for the place and time of an upcoming auction and the manner in which the auction will be held. The treasurer’s office will provide the investor with a list of property liens that will be auctioned and the rules that govern their sale, such as preregistration requirements and the accepted methods of payment.
- Bid on the Tax Lien: During the auction, investors can either bid down the interest rate on the tax lien or bid up and pay a premium for it. The investor who accepts the lowest interest rate or pays the highest premium is awarded the lien. An investor might purchase a tax lien for several hundred or several thousand dollars depending on the property.
- Choose Your Next Move: Once an investor purchases the property tax lien, she becomes the new lien owner. As such, she can collect payments with interest from the property owner. She might also foreclose and attain title to the property.
- If a property does not sell at a tax-deed auction, the lien holder can become the owner of the property. Florida non-homestead property becomes the certificate holder’s at no additional expense. Homestead property can be deeded to the lien holder for a payment of half of the home’s assessed value. If the lien holder does not want to pay, the property is deeded to the county.
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.