Tax liens are a severe consequence of property tax debt that involves a complex process aimed at collecting unsettled tax payments for the IRS. The government issues tax liens on properties owned by homeowners who neglect their duty to pay their property taxes.  Tax lien certificates are sold by the county to investors at public tax lien auction sales.  After an investor obtains a winning bid on a specific tax lien certificate, a lien is placed on the property and a certificate is issued to the investor that outlines all debt, penalties, and interest still to be paid on the property. 

A tax lien certificate, however, does not grant the investor (or holder of the certificate) immediate ownership of the property.  After a certificate has been issued to an investor, a redemption period is provided to the property owner granting adequate time to repay the tax debt plus interest expense.  If a property owner does not fulfill their responsibility of paying the outstanding debt, the investor acquires legal title to the property.  The redemption period varies by jurisdiction but most states and counties generally require a 2-year period to pass before the property title can be handed over to the investor.  If a property owner manages to pay off the certificate before the redemption period has come to an end, the certificate is returned to the county and the investor is given a refund for all costs associated with the certificate.

Interest rates are an integral part of tax lien certificates, especially for investors interested in purchasing at tax lien auctions.  Tax lien certificates are sold with an attached interest rate usually ranging from 8% to 50%, depending on the particular jurisdiction.  Florida loans, for example, offers an attractive interest rate of 18% giving investors an incentive to purchase and take on the responsibility of tax delinquent properties in Florida.  Not all states, however, use the tax lien method to settle property tax debt. 

The alternative method used to collect delinquent taxes is through the sale of tax deeds.  Tax deeds, similar to tax liens, are sold at government auctions and are won through competitive bidding among investors.  Unlike tax liens, tax deeds do not come with an attached interest rate because it gives title to the actual property, whereas a tax lien gives title to the tax debt owed on the property.  Tax deeds are also bound by a redemption period, which, at termination, gives legal ownership to the property.  After the redemption period has ended, the tax deed investor can purchase the property for the costs associated with the penalties and interest expense.  The tax lien investor, on the other hand, has the option of purchasing the property after the redemption period but for the costs associated with taxes, penalties and interest expense.    

For property owners, tax liens and tax deeds are an extremely hazardous consequence of tax debt that can ruin your credit score and potentially your financial future.  Once a tax lien is placed on a homeowner’s property, other creditors are given notice of this debtor’s inability to meet their property tax obligations which affects the debtor’s standing with other creditors.  Creditors may decide to intensify terms on loans previously issued to the debtor, such as increasing interest rates.  For these reasons, it is very important that homeowners practice financial responsibility by fulfilling their property tax obligations and doing their best to stay on good terms with the IRS.