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Tax Deed

DEFINITION

Legal document granting property ownership rights to the government due to a property owners failure to cure a property tax bill. The government is granted the right to sell the property against owed taxes by this document and can also transfer the property to the next purchaser. These types of sales are usually held at auctions and called ‘tax deed sales.

EXPLANATION

Owning a property means having to pay taxes on that property. The taxes are used for public services like police and fire service, road construction, public servants, water and sewer cleaning and improvement and more. If a property fails to pay property tax, they may lose their property.

A tax deed allows the administration to get back the taxes it’s owed through selling the delinquent tax payers’ property. These types of sales are usually held at auctions and called ‘tax deed sales.’ To acquire a tax deed, the county government, or other taxing authority has to take a series of legal steps, including sending a notification to the property owner, applying for the deed, putting up a notice on the property and then doing the same with a public notice. The specifics of this process vary according to local laws.

Process

The property is sold during a tax deed sale, which usually occurs through an auction. The price of the property will be determined by how much in taxes is owed, plus interest, plus the costs of the process of selling. The highest bidder gets the property only if they can pay the entire amount within 72 hours, or the sale is deemed invalid. Investors will often be on the lookout out for tax deed auctions, as they are able to get property at a lower price and can earn on interest. The new owner can charge the previous owner interest on the taxes once the sale goes through, because the new owner will have covered the previous one’s debt.

In some cases, the original owner of the property may have an opportunity to buy back their property. This is called a redemption period. The original owner has to pay their tax debt in order to redeem his or her property. If the owner decides to move forward, the cost of redeeming their property is the amount for which it was sold as well as interest.

That said, if owner makes no effort to redeem their property and the redemption period passes by, then the high bidder has the option of foreclosing.

In some cases, money put down by the winning bidder that goes over the minimum bid might be passed on to the delinquent owner, depending on the jurisdiction. The owner might lose this amount if he or she doesn’t claim it in time.

An example of a scenario like this would be:

A property at auction has been assessed to be worth $200,000 and come with a debt of $11,400 in back taxes. $98,000 is the highest bid. The original owner gets what’s left after the county takes $11,400 from the amount bid to cover the property taxes, or in this case, $86,600. The government is only interested in the back taxes owed and will not take the rest of the sale. The bidder will then have the title to the property and an equity profit of $102,000.

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