Investment Basics: Tax Liens and Tax Deeds

By Elsie Dudukovich0 Comments

Have you heard of people investing in tax liens or tax deeds and wondered what the difference was between the two? If you personally own property, invest in property, or know someone who does, you know all property owners pay property taxes.  What happens when these taxes are left unpaid, is the subject of this particular niche of investing. 

When property taxes are left unpaid by the property owner, the county places a lien against the property for the amount owed.  While each state and/or county decides their individual tax lien processes, in most cases the liens are auctioned off to investors.  Since a property cannot be sold or ownership transferred until the lien is cleared, this appeals to many investors.  Tax liens take precedence over other outstanding debts, which means ultimately, if the property owner fails to repay the liens, the property itself will be auctioned off, with proceeds going to tax liens first and then any remaining going to other outstanding debts on the property.      

In some counties/states, if a property owner fails to pay taxes, a tax deed is issued instead of a tax lien.  As with tax liens, the county is looking to regain the lost revenue and auctions off the property at an amount that will satisfy the outstanding debt.  The actual market value is not under the same consideration for the county as it would be at other property sales. 

What the investor walks away with at the end of the auction, is the primary difference between tax deed and tax lien sales. The winner of a tax deed auction, gains the property. There is no redemption period where the prior owner can come back to reclaim the property.  A tax lien winner, gains the right of repayment of the lien.     

Remember, while you might see some states listed as a tax lien or a tax deed state, no two states are identical in their processes regardless of the type of tax sales they may have.  As with all investing, doing your research before committing is important.  You need to be sure you understand the process as well as how to evaluate the potential risks and rewards. 

If you’re just getting started or are a seasoned investor, take a moment to check out the educational opportunities available on myEQUITY.  The online community has a dedicated forum for tax lien and tax deed investing for you to share and learn with others.