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What are Tax Lien Certificates?

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  • Written By: Diane Barnard
  • Edited By: A. Joseph
  • Last Modified Date: 17 November 2016
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When real estate taxes are not paid on time, they become a lien against the property. The county tax collector places a tax lien on the real estate and issues a deadline by which the taxes must be paid. If the obligation is not met by the deadline, the tax lien is sold at a public auction in the form of a tax lien certificate.

The rules governing tax lien certificates vary by region. A general procedure is common to most. Real estate taxes are due by a certain date each year and become delinquent if they are not paid by that date. Delinquent taxes usually are subject to late fees. A second deadline is set, and if the taxes and additional fees still are not paid by the second deadline, a tax lien certificate will be sold at auction.

Certificates to be sold and details regarding the auction usually are advertised in the local newspaper. This serves as additional notice to the property owner that his or her lien will soon be sold. It also gives the investor a chance to plan for the auction.

A tax certificate’s face value is greater than the amount of the taxes owed. It can consist of the unpaid tax, the interest due the purchaser, late fees for the tax collector and newspaper advertising costs. The owner pays the new amount to remove the lien from the property.

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Buying and selling tax lien certificates provides a threefold benefit. Firstly, the county still collects the revenue. Secondly, the owner has additional time to pay the back taxes. Finally, purchasing tax lien certificates is an opportunity for investors.

Property taxes are necessary to pay for county infrastructure such as transportation, public services and schools. If taxes are not paid, the county struggles to make up the deficit and might have to cut services to its residents. Tax lien certificates are sold for the amount owed, and the county recovers the needed revenue.

Usually, the property owner is afforded a certain length of time to redeem the tax lien after the certificate has been sold. This grace period can be as long as several years. Instead of losing his or her property immediately through tax foreclosure, the property owner gains extra time to pay the taxes and redeem the property.

Buying tax lien certificates offers a low-risk investment opportunity. In order for the owner to remove the lien, he or she not only must pay the tax but also must pay interest. The investor makes money from the interest. Most tax certificates are redeemed, so they are considered a relatively safe investment. Anyone who can legally hold title to property can buy tax lien certificates.

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