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What is the difference between tax lien certificates and tax deeds?

On Behalf of | Sep 13, 2022 | Tax Liens

Tax deeds and tax liens are both tied to unpaid taxes. While they are grouped in the same category, each works differently from the other. Here is a quick look at the differences between the two.

What does a tax lien mean?

Tax liens are legal claims concerning unpaid taxes on a property. They is often placed on unpaid property taxes. Tax agencies can place liens against any type of property, whether it be an investment, residence, or business. The owner of a property with a tax lien cannot refinance or sell the property before clearing the tax debt.

Similarly, the IRS may place a federal tax lien on individuals who have not met their tax obligations. This is meant to compel them to pay their back taxes. After the debt is paid, the IRS will release the lien within 30 days.

Auctioning of tax lien certificates

If you are unable to pay your debt, your local tax authority may auction your tax liens. The auction transfers the tax debt to the tax lien certificate holder. Therefore, anyone who buys a lien certificate pays the entire debt, including any accrued interest.

The tax certificate holder does not own the property but collects interest on any tax debt. This interest is paid until the owner pays off all debt. The interest rate is anchored in state law and may be a fixed rate or a range such as 0% to 18%.

What is a tax deed?

A tax deed offers the holder the right to ownership of the underlying property. It is also issued by the local tax authority when a property owner defaults on their tax payments. Just like with tax liens, a tax deed goes to the highest bidder in an auction.

The deed can be auctioned in person or online. State law only allows taxing authorities to sell the entire property to collect delinquent taxes. Therefore, when you buy a tax deed, you are essentially buying the underlying property.

Some state laws give the property owner a period to redeem the property before the title transfers to the selected bidder. However, they would have to pay the property’s value, penalties, interest, and due fees.

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