Table of Contents

Tax Sale: Definition, How It Works, Two Types

By

The Investopedia Team

Updated May 10, 2022

Reviewed by

Lea D. Uradu

Fact checked by

Amanda Jackson

Part of the Series

Guide to Selling Your Home

Getting Ready to Sell

Selling Strategies

Real Estate Agents

The Owner-Seller Option

The Selling Process

Tax Consequences

Definitions A-O

Definitions P-Z

What Is a Tax Sale?

A tax sale is the sale of a real estate property that results when a taxpayer reaches a certain point of delinquency in their owed property tax payments.

Key Takeaways

A tax sale is the sale of a piece of real estate due to unpaid property taxes.
There are two types of tax sales: a tax deed sale, which sells the property, including unpaid taxes, at auction, and a tax lien sale, which sells the liens on the property to a buyer who may then pursue the collection of monies owed.
Before a tax sale, during a right-of-redemption period, a property owner may pay off their tax debt and reclaim the property.

Understanding Tax Sales

Every state has its own laws for tax sales that must be followed for these sales to be valid. The laws will vary based on which entity is requiring the taxes, whether it is a local or state jurisdiction. In most areas, the basic requirement is that adequate notice is given to the taxpayer to pay the outstanding taxes, and any resulting sale usually must be open to the public, so that an adequate price is obtained for the property. There is usually a waiting period that ranges from several months to several years before tax collection agencies are involved.

When a tax sale is triggered, the property owner has a right-of-redemption period. During this period they have the opportunity to pay off the delinquent taxes in full and reclaim the property. If the property owner fails to pay the back taxes, along with any accrued interest, the property is then eligible to be sold at auction or through other means by a governmental entity.

When a property goes to auction in a tax sale, the minimum bid price is usually set at 80% of the forced sale value of the property after subtracting any liens, based on the fair market value (FMV) as determined by the Internal Revenue Service (IRS).

2,500

The approximate number of U.S. jurisdictions—cities, townships, and counties—that allow tax lien sales, located in 23 states.

Tax Lien Sale vs. Tax Deed Sale

There are two types of tax sales that can occur when a property has unpaid property taxes. The first is a tax lien sale, and the second is a tax deed sale. In a tax lien sale, the liens on the home are auctioned off to the highest bidder, which gives them the legal right to demand lien collection, along with interest, from the property or homeowner. In the event that the property owner is unable to pay the liens, the bidder who purchased them can have the property foreclosed.

A tax deed sale, however, sells the entire property, unpaid taxes included, at a public auction. Jurisdictions may offer a right of redemption after a tax deed sale, which allows a homeowner to get their property back within a redemption period if they reimburse the purchaser the amount they paid at the sale.

Tax lien sales are both an incentive for the lien buyer to make money off the interest of the lien and a way to force the property owner to pay the outstanding taxes. Tax lien sales are only legal in 23 states in the U.S. (approximately 2,500 jurisdictions—cities, townships, and counties), and each state has its own cap for the maximum amount of interest that the new lien owner can accrue in interest.

What Can Cause a Tax Lien on a Home?

Tax liens may arise for past-due tax bills, including property tax, school tax, municipal water or sewer bills, and so on. The IRS or state tax authority may also put a tax lien on a home in the event of unpaid income taxes.

How Do I See If There Are Any Tax Liens on a Home?

Generally, tax liens are a matter of public record and can be found at a municipality's property records office (or website). This may be the office of the town or county clerk or tax assessor.

How Can I Buy a Home Subject to a Tax Sale?

Tax sales are often conducted via auction by a municipality (e.g., via the sheriff's office) and are publicly announced. You can often find auction announcements in local newspapers or online. You could also contact a municipality directly and inquire. Note that the tax lien is attached to the property itself, and not to the previous owner. This means that the buyer of the property will also have to satisfy the tax lien before the title can change hands.

Article Sources

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Internal Revenue Service. "What is a Levy?"
Internal Revenue Service. "Publication 594: The IRS Collections Process," Page 6.
Internal Revenue Service. "Publication 594 The IRS Collections Process," Pages 3 and 4.
Internal Revenue Service. "Publication 594: The IRS Collections Process." Pages 5-7.
Internal Revenue Service. "Selling Your Property."
U.S. Tax Lien Association. "Tax Lien Facts: Do All States Offer Tax Lien Certificates?"
Internal Revenue Service. "Publication 594: The IRS Collections Process." Page 7.
National Tax Lien Association. "Common questions about tax liens."

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