Property Tax Liens And The First Thing You Have To Know

April 7, 2017

Property Tax Liens And The First Thing You Have To Know

Property Tax Liens And The First Thing You Have To Know. The first thing you need to know when deciding to invest in property tax liens is if you are a tax deed state or a tax lien state. Or a hybrid.

I always suggest starting close to home. In your own state. At least in the beginning.

Thus, the first thing you need to determine is IF your state is a TAX DEED state or a TAX LIEN state.

Many of us in the industry use the term “tax liens” to refer to both. But, they are totally different and we shouldn’t do that. It only makes it more confusing for the novice.

The list below are TAX DEED states. If you live in one of these states and choose to invest and learn locally you are going to be dealing with TAX DEEDS. NOT TAX LIENS. Learn the difference.

Investors in Tax Liens are seeking to earn a high rate of interest whereas investors in Tax Deeds may want the best of both worlds, to earn a high rate of interest AND eventually OWN the property.

Basically the differences are defined below.

TAX LIEN STATES

When property taxes become seriously delinquent in a TAX LIEN STATE, the local government will sell a TAX LIEN. These are also referred to as tax certificates.

Consequently, this tax certificate gives you a priority lien on the property.

You earn interest that the property owner pays when he pays all the back taxes, interest and penalties.

No ownership is given to you in a tax lien state. Therefore, you are given no rights to the property. Nothing. You now have a priority lien and are entitled to a certain amount of interest on your money. That’s it.

If the property owner pays all the back taxes, interest and penalties he has “redeemed” the property and you earn your interest.

TAX DEED STATES

When property taxes become seriously delinquent in a TAX DEED STATE, the local government will sell a TAX DEED.

It is a “tax deed”, therefore this gives you an ownership interest in the property.

Upon purchase of the tax deed, you have an ownership interest. NOT ownership. The property owner still has the right of redemption and pay all his or her back taxes, interest and penalties and “redeem” the property. So don’t start moving in right away.

Should the property owner redeem the property you will receive a statutory amount of interest established by the state.

Most of all, the property owner may NOT pay and the plot thickens, Thus it gets more complicated. In some states you may very well own the property. In other states, the property then is subject to foreclosure auction. It differs. There are also hybrid states where it gets more confusing.

Therefore, my point is, learn the laws of your own state first.

And know that there are “Tax Lien” states and “Tax Deed” states and hybrids!

The following are TAX DEED states.

  • Alaska
  • Arkansas
  • California
  • Connecticut
  • Delaware
  • Florida
  • Georgia
  • Hawaii
  • Idaho
  • Kansas
  • Maine
  • Michigan
  • Missouri
  • Nevada
  • New Hampshire
  • New Mexico
  • New York
  • North Carolina
  • North Dakota
  • Ohio
  • Oklahoma                          
  • Oregon
  • Pennsylvania
  • Rhode Island
  • South Dakota
  • Tennessee
  • Texas
  • Utah
  • Virginia
  • Washington
  • Wisconsin

 

These however are TAX LIEN states

  • Alabama
  • Arizona
  • Colorado
  • Florida
  • Illinois
  • Indiana
  • Iowa
  • Kentucky
  • Maryland
  • Mississippi
  • Missouri
  • Montana
  • Nebraska
  • New Jersey
  • North Dakota
  • Ohio
  • Oklahoma
  • South Carolina
  • South Dakota
  • Vermont
  • West Virginia
  • Wyoming
  • District of Columbia 

 

Sounds rather easy right?

Now that you have those figured out you have to understand that the following states are actually “HYBRID” states.

Although listed above, these states are neither pure tax lien nor pure tax deed states.

Hybrid states allow real estate investors to purchase the tax deeds by paying the delinquent taxes plus interest.

However, the property owners may buy back their properties during the redemption period set by state statutes and pay the back taxes plus interest.

Thus the hybrid states are Connecticut, Delaware, Georgia, Hawaii, Louisiana, Massachusetts, Pennsylvania, Rhode Island, Tennessee and Texas.

Consequently, this all takes me back to my original point. The first thing you need to do is study your state law and determine if your state is a “Tax Lien”, “Tax Deed” or a “Hybrid” state. As a result, it’s your starting point.

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