How Does A Tax Lien Foreclosure Work?

Confused about how a tax lien foreclosure works? We’ve got answers.

authorOlga Ronis
Aug 12, 2023
Photo by Nataliya Vaitkevich:

What Is A Tax Lien?

Tax liens are a debt obligation or claim the city, town, municipality, or government makes on a property when the owner fails to pay their annual property taxes.

Property taxes are calculated locally in the US using a ‘total tax rate.’ The total tax rate for each property is a number – which includes all public expenses covered by taxpayers in that area – multiplied by a property’s assessed value. That way, more valuable properties pay a higher percentage in property taxes.

Property taxes are levied together from school districts, counties, and cities. Property taxes are always tied to the total value of the property as a percentage.

Property taxes fund public projects and expenses like garbage collection, roads, schools, and police.

In the US, the average homeowner pays just over $2,500 in property taxes. Tax rates vary by state. In 2022, the states with the highest property taxes were Vermont, Connecticut, Illinois, and New Jersey, with rates ranging from 1.43% to 1.79% of the total property value. Hawaii, Alabama, and Arizona had the lowest rates, averaging 0.30%.

What Is A Tax Lien Foreclosure?

Contrary to popular belief, falling behind on mortgage payments is not the only way you can get your home foreclosed. A tax lien foreclosure occurs when you fail to pay your property taxes – even a small amount, much lower than the property’s value, can lead to foreclosure.

In Texas, property taxes are due in January (this may vary depending on the state).

Depending on the state you live in, failure to pay property taxes may lead to a tax lien foreclosure or a tax deed sale. Remember that this can happen even if you’ve paid your mortgage in full.

Tax Lien Foreclosure Vs. Tax Deed Sale

Tax liens and tax deed sales are the two main ways a municipality can have a legal claim against the assets of individuals or businesses that fail to pay property taxes.

To generate lost revenue from unpaid taxes, municipalities, and local governments offer investors the option to invest in tax liens and tax deeds by paying off the homeowner’s outstanding debt.

However, it’s important to note that tax lien and tax deeds differ.

A tax lien is a claim the government makes on a property – and investors who choose to invest in this type of lien are purchasing the right to collect interests on the unpaid property taxes and place a lien on the property.

Basically, investors purchase the right to act as a tax authority and collect all property tax payments from that property. Depending on the location, interest rates on property taxes range from 2%-36%.

Illinois is the most attractive state, with penalty interests going as high as 36%. The rate is between 16% and 18% in Florida and Arizona.

If the owner pays out the outstanding balance on the tax lien within the stipulated period – if you’re in Texas, that’d be in January every year –the investor who purchased the tax lien gets back their initial investment plus any interest earned along the way.

If the owner doesn’t pay the outstanding tax balance, the property goes into a tax deed auction. After the tax deed is sold at auction, property ownership is transferred to the buyer of the tax deed.

Financing Flexibility

If you’re looking to finance a foreclosed home purchase, the Department of Housing and Urban Development (HUD) offers excellent options for first-time homebuyers:

  • 203(k) Rehab Mortgage Insurance (Federal Housing Administration & HUD)
  • HomePath ReadyBuyer program (Fannie Mae)
  • The HomeSteps program (Freddie Mac Homes)

Real estate inventors don’t qualify for these financing options – only first-time home buyers who intend to use them as their primary residence. Here’s what each of these programs offers:

  • The 203(k) Rehab Mortgage Insurance can be used to purchase or rehabilitate a home. You can apply through an FHA-approved lender. 
  • The HomePath ReadyBuyer program offers 3% of the purchase price in cost assistance for first-time homebuyers. This applies to the purchase of a HomePath property.
  • The HomeSteps program offers housebuyers – not necessarily first-time homebuyers – the option to purchase HomeSteps homes without competition from real estate investors.


What Happens If You Don’t Pay Property Taxes?

If you don’t pay your property taxes on time, the taxing authority may sell your property through tax foreclosure or a tax deed to pay off any outstanding debt.

Property taxes are calculated based on a property’s assessed value, your tax filings from the previous year, and the average local tax rate in your county.

This doesn’t happen overnight – in general, you have until the end of January every year to pay off your property taxes. Before you pay them off, any outstanding debt will become a lien on the property.

How Do I Remove A Lien From My Property?

If the lien on your property is accurate, the easiest way to remove it is to pay it off. After you pay it off, fill out a release-of-lien form – a clerk at your closest county office can provide one for you. The lien holder must also sign the form before a notary. Alternatively, you can hire a local attorney to take care of it.

If the lien on your property isn’t accurate, you’ll need to contact your lawyer. You can also contact the creditor or lien holder to provide proof of your debt.

What Is A Tax Yield Investment?

Tax equivalent yield is used to visualize how much you’d earn from tax-free investments compared to taxed assets.

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