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What Happens When Property Taxes Aren’t Paid

What Happens When Property Taxes Aren’t Paid

By definition, a lien is a claim against an item, which affects the ability to transfer ownership by another party, which utilizes that item as security to repay a loan, or other claims. Ad valorem taxes, otherwise known as property taxes, are county assessed taxes on real property within the county boundaries.

Every piece of real estate is prone to property taxes: vacant land, raw land, and occupied land. Each property's tax rate is found by combining the property value and the county's estimated budget for one year. This is why the assessed value of the home is most often different than the fair market value.

The county uses property taxes to fund things such as the fire department, police department, road signs, streets, development projects, schools, etc. This is why this investment exists, to give the government its primary source of income. If property taxes were non-existent, then county governments would be bankrupt.

What Is Property Tax?

Property tax is a tax paid on property that is owned by an individual or other legal entity, such as a business. Property tax is most commonly a real estate ad-valorem tax, which can sometimes be classified as a regressive tax. It is determined by a local county where the property is located and paid by the property owner. The tax is typically assessed on the value of the property. Jurisdictions also tax personal property, such as boats or cars.

The local governing body will then use the taxes to fund water and sewer management, and provide policing, fire protection regulations, schools, highway construction, libraries or other services that may benefit the community. 

The amount property owners owe in property tax is determined by multiplying the property tax rate by the lands' current market value in question. Most taxing authorities will reevaluate the tax rate yearly. Almost all taxes are levied on real property, legally defined and classified according to the state. Real property includes land, specific structures, or other buildings.

In the end, property owners are subject to the rates calculated by the municipal government. A municipality will hire a tax assessor who evaluates the local property. The assessor will then assign property taxes to owners based on the current market values. This value will become the assessed value for the home.

The payment schedule of property taxes will vary depending on the location. In almost all local property tax codes, the owner can discuss the tax rate or argue for a different one. When property taxes are left unpaid, the taxing authority may assign a lien against the property. Buyers should always request a full review of any outstanding liens before purchasing any property.

The terms property tax and real estate tax are sometimes confused. But to be clear; Real estate tax is a kind of property tax. But it's not true the other way around. Not all property taxes are real estate taxes.

In addition to real estate, many local counties will also rely on property taxes against tangible personal property. Both types of property are tax-deductible if you file Schedule A with your income taxes. Because of the Tax Cuts and Jobs Act, however, the amount of state and local taxes that taxpayers could deduct on their federal income taxes fell from unlimited to $10,000 per year for either married couples or single taxpayers.

In short: Real estate taxes are taxes on genuine property only; property taxes can include both real property and tangible personal property.

Tax Lien Scenario

If a homeowner has defaulted on his payment, then the mortgaging bank will start the pre-foreclosure process. A tax lien will then be issued for the property so that the right to retain the property can be gained. You can do real estate investing in tax liens for a certain property that has been issued a lien and put out for an auction sale. You can earn profit from this because the state will pay fixed interest on a tax lien, and others will start the bidding price at auctions in the amount of the lien. Suppose the tax lien is unpaid during the duration of the redemption period. In that case, all other mortgages and liabilities on the house are extinguished, and the title to the property will be cleared. The investor will now own his or her new property with a clean title. However, if the owner can pay the property's liability, the investor can still earn through interest earned on the lien. Real estate investing in this manner can lead to profits in both ways.

Tax Lien Scenario

A property owner fails to pay their property taxes. Many property owners pay property taxes along with their mortgage, but sometimes the property owner does not have a mortgage, or dies, so the property owner fails to pay property taxes before the due date.

Instead of raising taxes for people paying taxes, the county places a tax lien on the property. After the tax lien is issued, it gives the county a way to collect debt differently: Tax lien certificates. The county issues the tax lien certificate and announces the sale. People go to the website, find out about the sale, and show up to purchase the certificate. Investors are not interested in the piece of paper, but in what the certificate represents – Guaranteed interest on investment!

The collection of property taxes is usually conducted by municipalities and governed by the state. Each state is free to set their own rules for selling and rewarding the buyer for each tax lien certificate, with few federal laws that bind the states. This is why careful research is crucial because each state differs and requires specific understanding. The states are remarkably similar in how they reward and function, with some key differences. Different states will often give higher percentage rates to the investor, or longer redemption periods for the property owner.

Investors can buy tax lien certificates the same way properties can be bought and sold at auctions. The auctions are located in a physical location or online, and investors can either bid on the interest rate on the lien or bid on a premium price they will pay for it. Usually the investor who accepts the lowest interest rate or pays the highest price is then awarded the lien certificate. With that said, buyers will often get into bidding wars over a given property, which drives down the rate of return that the winning buyer reaps.

Buyers of properties with tax liens need to be aware of other potential pitfalls and other unexpected costs if they want to properly own the property. The new owners of these properties may have to deal with difficult tasks, like evicting the previous owners. That may also be an unexpected cost, as help from a property manager or an attorney could be needed.

Anyone interested in purchasing a tax lien should probably begin by deciding on the type of property they'd like to hold a lien on. It can be commercial, vacant land, or property that needs some fixing up. At that point they would then contact their city or county treasurer's office to find out the location and time of the next auction. While it's true that the treasurer's office can tell the investor where to get a list of property liens that are scheduled to be auctioned, Marketplace Pro is a much more convenient solution as an online database. These rules will outline any pre registration requirements, accepted methods of payment, and other pertinent details.

The county holds the tax sale, and investors show up to buy the certificate. Investors want the interest that the government promises for that certificate. The auctioneer presents the certificate to the investors, and the ones interested will bid on the certificate.

The investor did not pay taxes for the property owner but purchased a certificate in the same amount the property owner owes to the county. The investor does not own the property, but the certificate. The investor may have the right to take ownership after the redemption period ends if the property owner fails to pay their taxes.

This investment was made in Florida, where the interest rate is 18% and the redemption period is 2 years. When the investor buys the certificate, the interest immediately builds up. Unlike stocks, or any other investment, you do not have to watch and worry about if the values are rising or dropping and if you are making or losing money every day. Tax liens let you know that you are making money and you can calculate the money you are making daily.

To remove the property's tax lien, the property owner has to pay property taxes to the county, not the investor. The property owner is unaware the investor exists. The property owner goes about their normal business and pays the property taxes owed but is also required to pay a late penalty. The county then writes a check to the investor for the amount of the taxes, plus the interest paid as a penalty for the owner. The property owner had to pay the same 18% the investor earned, and the county passes that money straight to the investor.

What if the property owner never pays the proper tax amount?

The tax lien certificate the investor bought gives them the right to take ownership of the property through foreclosure. This means that with tax liens you either get your investment plus a high interest rate such as 18%, or you get the property.

This is a Win/Win/Win situation. The county gets their operating money, the property owner receives a redemption period to pay their taxes, and the investor gets a substantial return.


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United Tax Liens is a group of experienced, active investors providing everyday people with access to one of the best Real Estate Investment vehicles available today.

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