Tax Lien Sales Explained: What Happens When Property Taxes Go Unpaid
TL;DR
When property taxes go unpaid, counties sell the debt through tax lien sales. Investors bid on the right to collect the delinquent taxes plus interest. The homeowner gets a redemption period (usually 1-3 years) to pay back the investor with interest. If they do not pay, the investor can foreclose and take ownership. About 29 states use tax lien sales. The rest use tax deed sales, where the property itself is auctioned. Either way, unpaid property taxes can cost you your home.
How Tax Lien Sales Work
A tax lien sale is a public auction where the county sells the tax lien on properties with delinquent taxes. The county gets its money. An investor gets the lien. The homeowner gets a deadline.
Here is the step-by-step process:
- Delinquency: A homeowner misses the property tax payment deadline
- Notice: The county sends delinquency notices and publishes the property on a list
- Lien creation: The county places a tax lien on the property
- Auction: The lien is offered at public auction, usually annually
- Bidding: Investors bid, typically competing by bidding down the interest rate or bidding up the premium
- Sale: The winning bidder pays the delinquent taxes and receives a tax lien certificate
- Redemption period: The homeowner has a set period to pay back the investor with interest
- Resolution: The homeowner either redeems (pays off the lien) or the investor forecloses
Tax Lien Sale vs Tax Deed Sale
States use one of two systems, and the difference matters enormously for homeowners:
| Feature | Tax Lien Sale | Tax Deed Sale |
|---|---|---|
| What is sold | The debt (lien certificate) | The property itself |
| Buyer gets | Right to collect debt + interest | Deed to the property |
| Homeowner keeps property? | Yes, during redemption period | No (but may have redemption rights) |
| Typical redemption period | 1-3 years | 0-12 months (some states have none) |
| Interest rates | 8-36% depending on state | N/A |
| Number of states using this | About 29 | About 21 |
States That Use Tax Lien Sales
The following states sell tax liens (not the property itself) at auction. Interest rates and redemption periods vary:
| State | Max Interest Rate | Redemption Period |
|---|---|---|
| Arizona | 16% | 3 years |
| Colorado | 9-12% | 3 years |
| Florida | 18% | 2 years |
| Illinois | 18% per 6 months | 2-3 years |
| Indiana | 10-15% | 1 year |
| Iowa | 24% | 2 years |
| Maryland | 6-24% | 6 months-2 years |
| New Jersey | 18% | 2 years |
| South Carolina | 3-12% | 1 year |
What Happens During the Redemption Period
After the lien is sold, you (the homeowner) still own your property and can still live in it. But you owe the lien holder the original tax amount plus interest, penalties, and any fees. During this period:
- You can pay off the lien at any time and clear the debt
- Interest accrues at the rate set by state law or the auction
- The lien holder cannot evict you or take any action against the property
- You can sell the property, but the lien must be paid from the proceeds
- You cannot get clear title insurance until the lien is resolved
What Happens If You Do Not Redeem
If the redemption period expires and you have not paid, the lien holder can begin foreclosure proceedings. The process varies by state but generally involves:
- Filing a petition with the court
- Providing proof that the redemption period has expired
- Court issues a judgment transferring ownership
- The lien holder receives a tax deed to your property
At this point, you lose your home. Any equity above the lien amount may or may not come back to you depending on state law. In many states, the former owner receives nothing.
Why Investors Buy Tax Liens
Tax lien investing is popular because the returns are secured by real property. An investor pays a few thousand dollars in delinquent taxes and earns 8-18% interest if the homeowner redeems. If the homeowner does not redeem, the investor potentially acquires a property worth far more than the lien amount.
In practice, over 95% of tax liens are redeemed by the homeowner. Investors make their money on interest, not property acquisition.
How to Avoid a Tax Lien Sale
Prevention is straightforward: pay your property taxes on time. But if you are already behind:
- Set up a payment plan: Most counties will work with you before the lien is sold
- Apply for relief programs: Hardship, senior, veteran, and disability programs may reduce or defer your taxes
- Pay before the auction date: You can usually pay the full delinquent amount up until the day of the sale
- Check your assessment: If your taxes are high because your property is over-assessed, appealing could reduce future bills significantly
Check Whether You Are Overpaying
Sometimes the reason homeowners fall behind on property taxes is that the bill is simply too high. Over-assessment is more common than most people realize. If your assessed value is inflated, every year's tax bill is larger than it should be.
Our free property tax analyzer checks your assessment against comparable sales in your area. If your property is over-assessed, you may be able to lower your bill through a straightforward appeal process, making it easier to stay current on future payments.
Frequently Asked Questions
What should I know about tax lien sales explained: what happens when property taxes go unpaid?
When property taxes go unpaid, counties sell the debt through tax lien sales. Investors bid on the right to collect the delinquent taxes plus interest. The homeowner gets a redemption period (usually 1-3 years) to pay back the investor with interest.
How Tax Lien Sales Work?
A tax lien sale is a public auction where the county sells the tax lien on properties with delinquent taxes. The county gets its money. An investor gets the lien.
How do they compare in terms of tax lien sale vs tax deed sale?
States use one of two systems, and the difference matters enormously for homeowners:
What should I know about states that use tax lien sales?
The following states sell tax liens (not the property itself) at auction. Interest rates and redemption periods vary:
What Happens During the Redemption Period?
After the lien is sold, you (the homeowner) still own your property and can still live in it. But you owe the lien holder the original tax amount plus interest, penalties, and any fees. During this period:
What Happens If You Do Not Redeem?
If the redemption period expires and you have not paid, the lien holder can begin foreclosure proceedings. The process varies by state but generally involves:
Why Investors Buy Tax Liens?
Tax lien investing is popular because the returns are secured by real property. An investor pays a few thousand dollars in delinquent taxes and earns 8-18% interest if the homeowner redeems. If the homeowner does not redeem, the investor potentially acquires a property worth far more than the lien amount.