Tax Liens and Tax Deeds


 Tax liens and tax deeds should be a serious consideration if you are thinking of investing in real estate.  Each state has its own set of laws and rules when it comes to tax liens and deeds.  You should make yourself familiar with those laws and rules in any state where you are considering investing in a lien certificate or deed.

Tax liens occur when a property owner fails to pay the property taxes that are due on a piece of property that he or she owns.  Once a certain amount of time passes after a tax payment becomes delinquent, the taxing authority can place a lien on the property.  The taxing authority, of course, must collect taxes in order to provide the services needed in that community.  If they do not collect the tax they will not have the funds to provide those necessary services.  To be sure that the taxing authority can collect funds they will sell tax lien certificates to investors.  The certificate will include past due tax, any penalties and interest.  The interest rate will depend on the state and the format of the auction that is conducted when selling the certificates.  If the property owner pays the amount due to the taxing authority in the prescribed amount of time (the redemption period), the taxing authority will then pay the tax lien certificate holder (the investor) the principal, penalties and interest.

A tax deed purchase is when you actually acquire title to property at the tax deed sale.  Generally, in most tax deed states, you will own the property free and clear of any other encumbrances that may have existed on the property.  In a pure tax deed state once you, the investor, own the property the prior owner has no right of redemption.    

As mentioned, some states are tax lien states.  To be clear, in a tax lien state you do not acquire ownership or title to the property.  Some states are tax deed states.  In a tax deed state you acquire ownership and title to the property. 

There are a number of states that are considered hybrid states.  Their process is a mix of tax liens and deeds.  For example, Connecticut is a hybrid state.  You can actually acquire title to the property but it is subject to the prior owner having the right to redeem (by paying the back taxes, interest and any penalties in full) within a six-month period, and getting the property back.

Tax liens and deeds can be a lucrative investment.  You can earn as much as 18 percent or more, or even come away with property that is worth much more than what your capital investment is.  When you know what states you have an interest in you should research the process and properties before you bid.  If you are investing in a lien or hybrid state you must know how long your money may be inaccessible to you.  Don’t give up.  You may find that there is heavy competition in some areas, but if you can get in the game it can be lucrative.

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