REO and Foreclosure Property Tax Issues for Investors

TL;DR

Buying REO and foreclosure properties creates unique property tax complications: back taxes may be owed, liens may not be cleared at sale, reassessment on purchase can significantly change the tax bill, and the property's condition often does not match the assessment. Smart investors check for tax liens during due diligence, negotiate back tax responsibility at closing, and appeal overassessments based on the property's actual condition. The discount you got on purchase price does not help if unpaid taxes eat into your margin.

Property Tax Complications in Foreclosure Purchases

Foreclosure and REO properties offer investors the potential for below-market acquisitions. But property taxes create complications that can erode your bargain if you are not careful.

Back Taxes and Tax Liens

When a property goes through foreclosure, the previous owner often stopped paying property taxes long before they stopped paying the mortgage. This creates a tax delinquency that may or may not transfer to you as the buyer.

The treatment depends on the type of foreclosure:

Foreclosure Type	Back Taxes	Tax Liens
Bank foreclosure (judicial)	Usually cleared at sheriff's sale, but verify	Senior liens may survive
Bank REO sale	Bank typically pays delinquent taxes before selling	Usually cleared by bank
Tax lien sale	You ARE buying the tax lien, not the property (initially)	You hold the lien
Tax deed sale	Typically sold free of back taxes but not always	May have other liens
Short sale	Negotiated at closing. Back taxes may be seller's or buyer's responsibility	Must be addressed in settlement

Never assume back taxes are handled. Check every time.

Due Diligence Checklist for Foreclosure Property Taxes

Title search for tax liens. A standard title search should reveal property tax liens. Make sure your title company specifically checks for municipal and county tax liens, water/sewer liens, and special assessment liens.
Current tax status. Check the county treasurer's website for the property's current tax payment status. Look for any delinquent amounts, penalties, or interest.
Tax sale certificates. In some states, delinquent taxes are sold as tax lien certificates. If someone else holds a tax lien certificate on the property, they have a claim that must be resolved.
Special assessments. Sewer, water, road, and other special assessments may be attached to the property independently of general property taxes. These can survive foreclosure in some states.
Assessment vs condition. The current assessment may be based on the property's pre-foreclosure condition. After months or years of vacancy, the actual condition may be significantly worse. Document this for your appeal.

Reassessment After Purchase

In states with transfer-triggered reassessment, your purchase resets the assessment. For foreclosure purchases, this can go two ways:

In your favor: If the previous assessment was based on a higher pre-foreclosure value and you bought at a deep discount, your new assessment may be lower. A $250,000 property assessed at $250,000 that you buy at foreclosure for $175,000 might get reassessed to $175,000.

Against you: In states like Michigan where taxable value is capped, the previous owner's taxable value may have been well below the assessed value. When you buy, the taxable value uncaps to the state equalized value. Even at a discounted purchase price, your taxes may be higher than what the previous owner paid.

Appealing the Assessment on a Foreclosure Purchase

Foreclosure properties often have condition issues that the assessor does not account for. Common problems:

Vandalism during vacancy
Stolen copper, appliances, or fixtures
Water damage from burst pipes or roof leaks
Mold from prolonged vacancy without climate control
Overgrown landscaping and exterior deterioration
Code violations that require remediation

Document everything with photos, contractor estimates for repairs, and any inspection reports. Present this evidence to show that the property's value in its actual condition is significantly below the assessment.

Using Your Purchase Price as Evidence

Your foreclosure purchase price is a market transaction that reflects the property's value in its current condition. While assessors may argue that a foreclosure sale is not an arm's-length transaction, you can counter that:

The property was marketed on the open market (for REO sales)
Multiple bidders were present (for auction sales)
The price reflects the property's actual condition, not a premium or discount based on non-market factors

Many hearing boards accept foreclosure and REO sale prices as legitimate market evidence, especially when supported by comparable sales data and condition documentation.

Tax Lien Investing: A Different Game

Tax lien investing is distinct from buying foreclosure properties. When you buy a tax lien certificate, you are lending money to cover unpaid property taxes. You earn interest (rates vary by state, from 8% to 36% annually). If the owner does not redeem the lien by paying you back with interest, you may eventually be able to foreclose and take the property.

Key considerations for tax lien investors:

Research the property before buying the lien. A lien on a worthless property is worthless.
Check for senior liens (federal tax liens, state tax liens) that survive the tax lien foreclosure.
Understand the redemption period in your state. Some states give owners 6 months. Others give 3 years.
Budget for the costs of foreclosure if the owner does not redeem.

For more on tax lien investing, see our guide to tax delinquent property investment opportunities.

Negotiating Tax Responsibility at Closing

When buying an REO or foreclosure property, the allocation of property tax responsibility should be a negotiation point:

Proration. Standard closings prorate taxes between buyer and seller as of the closing date. Make sure the proration is based on the actual tax bill, not an estimate.
Back taxes. If there are delinquent taxes, negotiate for the seller (bank) to pay them at closing. Most banks selling REO properties will clear back taxes, but short sale sellers may push this to the buyer.
Credits. If you expect a reassessment increase after purchase, negotiate a closing credit to offset the first year's higher taxes.

Know the Tax Situation Before You Buy

Foreclosure deals can be great investments, but the property tax situation can make or break the deal. The PropertyTaxFight analyzer evaluates the property tax implications of your foreclosure purchase, including projected post-purchase assessment, back tax research, and appeal potential based on the property's condition. For investors evaluating multiple foreclosure opportunities, the Multi-Property plan at $149 covers up to 5 properties.

Frequently Asked Questions

What should I know about reo and foreclosure property tax issues for investors?

What should I know about property tax complications in foreclosure purchases?

Foreclosure and REO properties offer investors the potential for below-market acquisitions. But property taxes create complications that can erode your bargain if you are not careful.

What should I know about reassessment after purchase?

In states with transfer-triggered reassessment, your purchase resets the assessment. For foreclosure purchases, this can go two ways:

What should I know about appealing the assessment on a foreclosure purchase?

Foreclosure properties often have condition issues that the assessor does not account for. Common problems:

What should I know about tax lien investing: a different game?

What should I know about negotiating tax responsibility at closing?

When buying an REO or foreclosure property, the allocation of property tax responsibility should be a negotiation point:

REO and Foreclosure Property Tax Issues for Investors