What Are Tax Deed States? (2023)

What Are Tax Deed States? (2023)

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Doing business in tax deed states offers the potential to generate significant ROI in a short period of time. Understanding what tax deed states are and the difference between tax deed states and tax lien states can help you to leverage this as effectively as possible in your next real estate transaction. 

In this post, we’ll explore what tax deed states are, relevant tax information about tax deed states, and the vital differences between tax lien vs. tax deed states. 

Tax Deed States – Table Of Contents

What are Tax Deed States?

Tax deed states allow local governments to seize real estate property for unpaid property taxes. These policies ensure that the revenue derived from property taxes does not create a financial burden in the operation of state, county, or city governments.

What is a Tax in Tax Deed States?

Local governments can choose to levy the tax on any given property in a tax deed state. The tax is commonly referred to as property tax, which can be a form of revenue for local governments. Local governments can use property taxes to pay for government staff, government facilities, public schools, fire stations, road maintenance, and other services provided to residents. 

It is generally up to the individual state to determine the state revenue sources for maintaining public services to their residents. Therefore, income, sales, and property tax rates vary from state to state.

What is a Tax Deed Sale? 

A tax deed sale is a financial transaction invoked by a local government to recoup unpaid property taxes from a property owner. 

The local government can proceed with a public auction if a property owner fails to pay the required tax. In most cases, the local government first informs the public about the tax deed sale through a public notice in the newspaper or online. 

Because the ultimate goal is to recoup the local government’s lost revenue, a starting value must be assessed before auction. Some auctions set the minimum bid value at the cost of property tax owed plus expenses and fees. Other auctions set the minimum bid value at assessed property value levels. 

On auction day, the winning bidder receives a tax deed for the property, which assigns them ownership — at which point the winning bidder’s funds can satisfy the local government’s unpaid property taxes. 

Advantages of Participating in a Tax Deed Sale

Participating in a tax deed sale is a winning proposition for the local government and the bidder, but not for the property owner. The local government recoups its lost revenue for unpaid property taxes, and the winning bidder looking to flip homes has the potential to gain an asset significantly under market value. 

Participating in a tax deed sale can also be a lucrative strategy for buying your first home significantly below market value. However, if this is something you are thinking about for your real estate investment strategy, it’s important to understand the risks and requirements. 

For example, unless you have a sizable accumulation of cash to purchase the tax deed, securing financing or a line of credit may be required before any next steps. 

Additionally, doing business in states that do not offer “no redemption” periods can cause an element of complication to your overall sale and ownership process.  If the original owner exercises their right to redeem ownership within a specified period of time after the auction, the investor must relinquish the title accordingly.

List of Tax Deed States

The regulation of tax deeds occurs at the state level. Therefore, only some states in the union are tax deed states. The following states are tax deed states:

  1. Alaska
  2. Arkansas
  3. California
  4. Connecticut
  5. Delaware
  6. Florida
  7. Georgia
  8. Hawaii
  9. Idaho
  10. Kansas
  11. Maine
  12. Massachusetts
  13. Michigan
  14. Minnesota
  15. Nevada
  16. New Mexico
  17. New York
  18. North Carolina
  19. North Dakota
  20. Ohio
  21. Oklahoma
  22. Oregon
  23. Pennsylvania
  24. South Carolina
  25. Tennessee
  26. Texas
  27. Utah
  28. Virginia
  29. Washington
  30. West Virginia

Tax Deed States with No Redemption Periods

Most tax deed states have no redemption periods once a property sells at auction. This means that the original property owner has no rights to reclaim or redeem ownership of the property once auctioned off.

It’s important to note that there are a handful of tax deed states which offer redemption periods. Depending on the individual state, the original property owner may have a specified timeframe to redeem their property back from the investor. Redeeming a property generally requires the original property owner to repay the investor 100% of the funds the investor paid out for the property, along with any assigned penalties.

Tax deed states with no redemption period include: 

  1. Connecticut
  2. Georgia
  3. Rhode Island
  4. Tennessee
  5. Texas

First-time home buyers hoping to live in a home purchased below market value through tax deed sales in these states should proceed with caution. Until the specific redemption period has expired, the risk of the previous property owner coming forward to redeem their property can be a looming prospect.

what are states with tax deeds

Is a Tax Deed the Same as a Tax Lien?

Tax deeds are significantly different from tax liens. Understanding the differences between tax lien and tax deed states can help you have a better overall experience with your next venture. 

In tax lien states, if a property owner has unpaid property taxes, the local government does not seize or auction the property from the property owner as with a tax deed state. Instead, the local government places a lien on the property for the property taxes owed and protects the property owner from displacement.

What Does a Tax Lien Sale Look Like?

After a specified period in which property taxes are unpaid, the local government has the right to place a lien on the property and organize a tax sale. The local government will inform the public about the tax sale through a public notice in the newspaper or online. On the tax sale day, the local government will sell the tax lien to the highest bidder. 

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The bidding investor then pays the local government the amount of property taxes in arrears. The property owner can then remain in the property. 

The investor retains the right to collect the unpaid property taxes owed, along with interest, from the original property owner. If the property owner fails to pay the investor within a specified period, the investor has the right to foreclose on the property and assume ownership.

Advantages of Participating in a Tax Lien Sale

Tax liens are also considered a helpful strategy for all parties involved. With tax liens, the local government recoups its unpaid property tax revenue stream. The property owner benefits because he does not lose ownership of the house as long as the outstanding property taxes are paid to the investor owning the lien. Then the investor either reaps interest from his investment or assumes ownership of the property in the case of a foreclosure.

List of Tax Lien States

The following states are tax lien states:

  1. Alabama
  2. Arizona
  3. Colorado
  4. Connecticut
  5. Florida
  6. Illinois
  7. Indiana
  8. Iowa
  9. Kentucky
  10. Louisiana
  11. Maryland
  12. Mississippi
  13. Missouri
  14. Montana
  15. Nebraska
  16. New Hampshire
  17. New Jersey
  18. New York
  19. Ohio
  20. Rhode Island
  21. South Dakota
  22. Vermont
  23. West Virginia
  24. Wyoming

States with Hybrid Tax Deed and Tax Lien Systems

It’s important to note that a handful of states use a combination of both tax deed and tax lien systems. For example, Ohio uses a tax lien system but has a tax deed sale process if the property owner fails to pay the taxes owed. 

Hybrid states include:

  1. Connecticut
  2. Florida
  3. New York
  4. Ohio
  5. West Virginia

Do Your Due Diligence

Before investing in a property sold at a tax sale, we recommend doing your due diligence. Consider researching the property and the surrounding area to ensure it is a good investment, and take a look at the property title to ensure it is free and clear of any liens or mortgages.

You might consider researching the tax sale process in the state you are interested in investing in. Possible areas of focus can include rules and regulations of the sale process in your state, as well as the redemption period if applicable.

The bottom line

Understanding the difference between doing business in tax deed states and tax lien states is crucial for real estate investors. Both can be excellent investment vehicles if appropriately leveraged. 

Regardless of the strategy and sale type, it’s recommended that all investors must conduct adequate research and due diligence on properties of interest.  After all – legislation regarding tax deeds and tax liens can change at any time. Staying abreast of state laws will go a long way in making informed decisions and avoiding any potential problems down the road. 

With the proper knowledge and preparation, tax deed states can be a lucrative opportunity for real estate investors. 

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