The Difference between Tax Liens and Tax Deeds


To understand the difference between tax liens and tax deeds, it is suitable to look at each individually.

Tax Liens

A tax lien is associated with the government’s entitlement to hold back property due to failure of tax payment. This usually happens when a property owner has unpaid debts in the form of taxes. The government will issue a notice of seizure and entitlement to the action. The property will only be held until the owner can make the overdue tax payments. If unable to make complete payments, other assets may be seized to pay up the balance. On the other hand, the government can sell the liens to investors who will pay for the balance due. The owner of the property will be notified of the sale and is given a redemption period to try and pay off the taxes himself. Failure to do so will result in him losing the property. Tax liens do have a negative effect on an individual’s credit score. If the payments are not made, this brings down the credit score which will affect other financial endeavors.

Tax Deeds

A tax deed entails the actual deed of a property. Whereas the government will sell only a tax lien for property whose taxes are unpaid, a tax deed gives the investor ownership of the said property. In some states, purchase of the deed comes with the tax lien as well. This means any unpaid monies are now the responsibility of the new property owner. So, prior to taking up ownership of property, it is wise for an investor to make sure there is no tax lien involved. It is also advisable to look into the property to ensure it’s in good condition.

Difference between tax liens and tax deeds

When an investor takes up tax liens, he earns a certain percentage in interest once the property owner pays up his tax dues. Basically, an investor looks to purchase liens not to own property but rather to make a small profit. When he pays the liens due on the property, the government will refund him his money plus the interest as soon as the property owner pays up. Should the property owner be unable to pay within the given time period, the investor has authorization to foreclose on the property. This is advantageous to the investor because he gets to own the property for a fraction of what it is worth in the market. He, however, has to foreclose on it before the bank acquires it.

A tax deed investor, on the other hand, is in the market to own property at a low purchase price. They make a hefty profit from the market value of the property compared to what they initially pay to acquire the deed. This is a profitable investment though it carries with it a huge risk. Any unpaid dues on the property become the investor’s debt, which could end up costing a whole lot. In addition, if the market value of the property is low, the property might end up being a depreciating asset as he waits for the market to turn around.

Tax deeds and tax liens have their ultimate benefits but a lot of knowledge is necessary to maximize on either. There are a lot of possibilities on both ends but be sure to do your research carefully because each State has its own laws and rules that govern tax deeds and liens.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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