What is a property tax lien? In order to collect an unpaid property tax, the government sells an “obligation” (known as tax lien certificate) secured with the actual real-estate, for which owner failed to pay tax, to anyone who is willing to buy. The cost of such certificate is equivalent to the amount of unpaid tax for a property and it also carries annual interest. In other words, if you purchased such certificate, you would be betting on property owner not paying their tax in which case you will be getting their real-estate as a security (striking incredible return) or, if the owner does pay it back, you will receive your money with the interest (usually between 4% and 18% annualy). After its purchase, an average tax lien provides between 12 to 36 months for the property owner to pay back before the certificate buyer can claim the real-estate.
Tax deed is an authorization order by the government that allows to sell the real-estate, for which owner failed to pay tax. Essentially any tax lien becomes a tax deed at the end of its redemption period (as mentioned above, usually between 12 to 36 months). Depending on which state/province has issued the tax deed, it may be a tax deed that requires selling property via auction (known as tax deed sale or foreclosure), or it may have a predefined “last bid” price that has already been agreed on with the buyer at the time when tax lien was sold to them.
Tax liens terms, such as period allowed for redemption, annual interest rate, time of initial sale (usually done via tax lien auction) and transfer to other holders are regulated by municipal-level government. Generally, there are following stages involved in the lifecycle of a tax lien:
Stage 0: Current owner fails to pay tax.
Stage 1: The government sends current owner a warning note that a tax lien will be placed against the real-estate.
Stage 2: The government issues a tax lien and schedules a date to sell it:
Stage 3: Tax lien is sold to a buyer and countdown begins for the period allowed for redemption. During this time tax lien accumulates annual interest. The possible outcomes are:
Stage 4: Tax lien transforms into a tax deed. In most cases government issues series warnings to the property owner as it happens.
Stage 5: Foreclosure procedure, depending on which process applies:
Generally all tax liens are sold on “buyer beware” basis, and therefore they do carry a certain risk. More specifically, it is not guaranteed that the real-estate backing the tax lien will have a clear and marketable title. Typically governmental (Federal or State) liens and judgements can survive tax lien and tax deed sale. Each case is different.
The following states issue tax liens Alabama, Arizona, Colorado, District of Columbia, Florida, Illinois, Indiana, Iowa, Kentucky, Maryland, Mississippi, Missouri, Montana, Nebraska, New Jersey, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Vermont, West Virginia, and Wyoming.
The following provinces issue tax liens (more precisely – tax deeds) and make them available via public sale (auction or tender) Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Prince Edward Island, Quebec, and Saskatchewan.
Note: for the simplicity on this website we use term tax lien for both – tax liens and tax deeds.