Failure to pay property taxes for a defined period of time can trigger the sale of the associated real estate. This is known as a tax sale and it occurs when the delinquent taxes form a lien against the property. The tax authority then sells either the lien or the deed to the property on the public market. The sale can be a tax deed sale or a tax lien sale.
The specifics of tax sales can differ somewhat based on state and jurisdiction laws, but they follow a similar pattern.
Definition and Examples of Tax Sales
In most U.S. locations, you must regularly pay property taxes if you own real estate. They're sometimes referred to as real estate taxes. Your property can be sold on the public market if you fail to remit the appropriate amount of property taxes to the government on a timely basis. This is known as a tax sale.
Tax sales can also occur when individuals or other entities fail to pay taxes owed to the Internal Revenue Service (IRS). The IRS can seize a taxpayer's property in a process known as a levy and conduct a tax sale auction.
Tax sale rules vary by state, so be sure to clarify how the rules are applied in your area.
Let’s say you own a home in New Jersey. You owe $6,000 in property taxes per year on that home, payable in four quarterly installments. Due to financial hardship, you're unable to make those payments.
The state of New Jersey will eventually collect the taxes you never paid by selling a tax sale certificate to the property. The certificate forms a lien against the home. If someone purchases the tax sale certificate, they could begin foreclosure proceedings on the property, although they must wait two years to do so. After two years, they would be able to go through with the foreclosure and own the property.
How a Tax Sale Works
You, as the homeowner unable to pay property taxes, would typically retain the right to "redeem" the certificate for a while after it's sold. You can effectively buy back the lien against your property prior to foreclosure by paying the taxes that you owe, plus any penalties and interest. The exact process can vary by jurisdiction.
Most tax authorities also provide for "right of redemption" periods prior to the deed or a lien against the property being sold. The deed or lien would only be sold if you failed to remit the taxes owed by a specified deadline.
The governing body will typically auction off the property. The opening minimum bid is often the amount of the delinquent taxes plus interest. For example, in the case of that $6,000 delinquent tax bill in New Jersey, if the interest rate was 6% and it accrued monthly, you would owe a minimum of $6,360 after one month.
If you’re on the bidding side of a tax sale, you must typically place a deposit with the tax authority to be permitted to participate in a tax sale auction. Property taxes will continue to accrue after the sale, and if you win, you must pay them or the lien or deed will be resold at the next auction.
You rarely have the option of inspecting a property or having it appraised prior to bidding, although most tax authorities urge you to do your "due diligence" before buying the deed or the lien so you know what you're getting into.
Prior to bidding at a tax sale, you may be able to get copies of the property assessments that led to the tax due.
Types of Tax Sales
The difference between a tax deed sale and a tax lien sale lies in what the highest bidder actually receives for their winning bid, but both can eventually result in the property going to the winning bidder.
Tax Deed Sale
A tax deed sale conveys the deed to the home or property to the highest bidder. A property with delinquent taxes is sold along with its accompanying tax bill, which is still payable to the government. The winning bidder must pay the tax bill.
Tax Lien Sale
A tax lien sale occurs when the government auctions off a lien that's been placed against the property for unpaid taxes. The highest bidder wins and purchases the tax lien certificate. Ownership of the lien gives them the right to collect on it from the property owner. The lien purchaser can begin foreclosure proceedings if the homeowner doesn't pay the property taxes owed within two years. If the taxes aren’t paid by the homeowner, the bidder can seize and sell the property.
- Tax sales occur when owners fail to pay property taxes owed, and a government entity places their property for sale in order to collect that debt.
- Tax sales typically trigger a right-of-redemption period that provides the property owner with an opportunity to pay their taxes and reclaim the property.
- Tax deed sales refer to the sale of the actual property, while tax lien sales refer to the purchase of a tax lien that's been placed against the property. Failure of the homeowner to pay off the lien can lead to foreclosure.