What is a tax certificate?

Tax certificates are legal documents that transfer property ownership to the government in the event the property owner fails to pay property taxes.

Definition and Example of Tax Certificates

A tax certificate allows the government to claim ownership of a property when the property owner defaults on the required property taxes. Tax certificates can apply to personal residences, commercial properties, and undeveloped land.

The purpose of tax certificates is to allow local tax agencies to recover unpaid property taxes. These taxes are used to fund government programs such as road improvements, building schools, or expanding law enforcement and emergency services.

When a tax certificate is issued by a tax collection agency, it can be sold at auction to the highest bidder. The buyer of the tax certificate gains rights to the underlying property. In this way, a tax certificate can be used as an investment tool for individuals looking to diversify their portfolios with real estate.

How Tax Certificates Work

When a person purchases a home or other property, they understand that they will pay any property taxes levied by the local government. After all, they benefit from the services provided by the local government.

If the property owner fails to pay these taxes, the tax assessor can issue a tax lien certificate. This tax certificate usually comes with a specific redemption period during which the property owner has the opportunity to pay the outstanding taxes. For example, in Broward County, Florida, the redemption period lasts for two years, but some states may set different timeframes for redemption.

If the property owner does not redeem, the tax collector can proceed to sell the tax certificate. This is where the property is sold at a public auction, similar to an eviction auction, which can be held in person or online. The highest bidder has the right to purchase the property.

If you win the bid at a tax certificate auction, you may need to pay a deposit. The remaining purchase price is typically due within 24 to 48 hours after the auction closes, although some states may allow more time.

Once the purchase of the tax certificate is completed, ownership of the property is transferred to the purchaser of the certificate. This means that the former owners of the home lose any rights to the property. In the meantime, the new owner takes on the responsibility for any existing liens on the property or any outstanding property taxes.

Tax Certificates vs. Tax Liens

Tax certificates are often confused with tax liens, but they are not the same thing. A tax lien is a legal order that allows a government entity to obtain a lien on a piece of property. For example, if you fail to pay your property taxes, the local government can obtain a tax lien certificate to recover what you owe.

With a lien, the underlying property cannot be sold or refinanced until the outstanding taxes are paid. If the property owner does not pay the due taxes, a tax lien certificate can be sold, just like a tax certificate, at an auction to the highest bidder. The auction winner pays the outstanding taxes and holds the lien on the property.

The homeowner must then pay the lienholder the amount owed, plus interest, to remove the lien from the property. Tax lien certificates can be an attractive investment for investors looking to diversify their portfolios with real estate and generate passive income in the form of interest payments.

When investing in tax certificates or tax liens, it is important to conduct proper research and understand the associated risks. For example, if you invest in tax certificates and do not thoroughly research the property, you may risk inheriting existing liens or tax debts.

Your ability to invest in tax certificates or tax liens may depend on where you live, as not all states and municipalities allow such sales.

Conclusions

Main

Tax deeds are legal documents that transfer ownership rights in a piece of real estate. A tax deed can be issued if the property owner has not paid the due property taxes. Properties with a tax deed are sold at a public auction to the highest bidder in what are known as tax deed auctions. Tax liens can also be issued against property owners with outstanding debts, but they differ from tax deeds. When investing in tax deeds or tax liens, you should conduct proper research and understand the associated risks.

Source: https://www.thebalancemoney.com/what-is-a-tax-deed-5202143