Property owners are required by law to pay all property taxes on time. And if they don’t, the properties become delinquent and incur interest and fines. If the owner cannot clear the tax payment, the properties can be purchased through various mechanisms, usually at a fraction of their market value.
While this can be a good opportunity for investors and homebuyers, these properties come with unique challenges and risks. Below, we’ll focus on everything about tax-delinquent properties.
What Are Tax Delinquent Properties?
Property owners worldwide must legally pay property taxes to their local government. The government uses the money to fund public services like infrastructure and schools. The taxes are assessed against the property’s value, and the property owners are given up to a specific time to clear the amount.
Depending on local regulations, they can pay these taxes annually or semi-annually. But when a property owner fails to meet their tax obligation within the specified timeframe, the property becomes tax delinquent. And because the government needs to recover the money, they put the tax delinquent properties on sale.
What Causes Tax Delinquency?
It doesn’t matter if you have paid half the amount you are supposed to; when the time elapses, your property taxes will accrue interest and penalties. But what exactly causes tax delinquency?
- Financial hardships – A property owner can struggle to pay property taxes because of financial difficulties like job loss or unexpected medical expenses.
- Mismanagement – Due to a lack of financial knowledge or carelessness, a property owner can mismanage their finances or prioritize other expenses over property taxes.
- Estate issue – In an inheritance dispute, tax delinquency can happen if no one has been picked to manage the property until the dispute is resolved.
- Abandonment – There are also cases where the owners abandon the property, and there’s no way of reaching them.
What Happens When a Property Becomes Tax Delinquent?
The goal of the government is to recover the taxes you owe them plus interest and penalties. If it’s clear you can’t pay the money, the government will place liens on the property. Depending on your local laws, the process can go through the courts.
In Rem Foreclosure
Your local government will file a case in court to be allowed to put a lien on the property or to buy the deed to the property after the period permitted by law (2 to 3 years). If you are lucky, the court could rule on a settlement whereby you can pay the money on a payment plan developed by the court and approved by both parties. Alternatively, the court will allow the government to place a lien on the property and sell the property at an auction.
Non-judicial Foreclosure
In some jurisdictions, there’s no requirement to go through the courts. The process will be handled by the government or designated entity responsible for collecting property taxes.
Depending on the jurisdiction and amount owed, the government will conduct tax lien auctions or tax deed sales. In a tax auction, they will sell the tax lien associated with the tax-delinquent property rather than the property itself. The bidders compete by offering to pay taxes, interest and penalties.
The winning bidder (lien holder) doesn’t gain ownership of the property immediately but will hold the lien against it. The property owner will now pay the lien holder the principal amount plus interest within a set timeframe. Otherwise, the lienholder will have the right to foreclose on the property. However, it is not guaranteed, and the process varies by jurisdiction.
The government will sell a tax deed if the property owner fails to redeem the tax lien in a previous auction. Bidders at tax deed sales compete to purchase the property outright, and the winning bidder becomes the new owner.
Unfortunately for the original owner, the ultimate goal of tax deed sales is to sell the property to recover the unpaid debt. The proceeds from the sale are used to pay off the property taxes or liens and any associated fees or penalties. But if there are surplus funds, they will be given to the property owner or other interested parties. However, the property is sold at a fraction of its market value, so very little money is left, if any.
Are Tax-Delinquent Properties a Good Investment?
The answer will depend on your level of experience in real estate and if you are a risk taker. Tax-delinquent properties are too risky for beginners in real estate due to the legal process, risk and uncertainty around the property. However, if you are a real estate guru with extra cash for repairs and other expenses that may arise and don’t mind the time it takes to get paid back, this is a perfect opportunity.
When property owners fail to pay property taxes within the set timeframe, the property becomes tax delinquent. The government will place a lien on the property, and if the property owner fails to redeem it at the end of the set time, it is put on tax deed sales. The property is sold to recover taxes, penalties and liens, and the owner loses ownership.
