Tax Deed Definition Example How To Invest In Tax Deeds

Tax Deed Definition

Explanation

All taxpayersAll TaxpayersA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws.read more are required to pay taxes due and file returns as per the timelines decided by the government on time to comply with the prevailing regulations. Suppose any taxpayer fails to pay any taxes on time. In that case, the government department may create a tax lien on any movable or immovable property of that taxpayer for non-payment of taxes. However, this tax lien does not depict an absolute change in ownership rights over the property. A tax lien may be reversed if the taxpayer repays all his dues. Tax lienTax LienTax Lien is a lawful claim concerning the assets of a person or a company that has not paid or failed to pay the taxes owed by the government. It serves as a secure payment of any debt like loans, taxes.read more notifies the government’s first right against the sale or realization of that asset. However, the government gets the right to seize the property if a taxpayer does not repay tax dues, even after creating a lien against the property. Once a property is seized, the government will call for an auction and sell the attached property. The complete process is organized just for the motive of the collection of delinquent taxes.

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Tax Deed Process

Every taxpayer has to pay taxes and duties levied by the government on time as and when they fall due. However, sometimes due to various reasons, for example, under financial distressFinancial DistressFinancial Distress is a situation in which an organization or any individual is not capable enough to honor its financial obligations as a result of insufficient revenue. It is usually the result of high fixed costs, obsolete technology, high debt, improper planning and budgeting, and poor management, and it can eventually lead to insolvency or bankruptcy.read more conditions, the taxpayer may not be able to comply with the prevailing tax laws and repay required taxes as and when required. Under such circumstances, tax authorities will first serve a show-cause notice for non-payment of relevant taxes. Followed by show cause notice, the department will issue a demand notice for the unpaid taxes. Even after serving demand notice, if the taxpayer fails to prepay taxes, the government will create a lien known as a tax lien over any property (movable or immovable) of the taxpayer. A tax lien does not directly transfer ownership rights in property from the taxpayer to the government organization.

A tax lien creates the first right against any economic benefit realized from that asset. At this stage also, the taxpayer has the option to repay taxes and get their property released from the tax lien. After the creation of the charge, the taxpayer may go for declaring himself bankrupt and take the proceedings further. If the tax remains unpaid, the government will take a further step and seize the property against which the tax lien was created. Once the property is seized, the government may further dispose of that property in any manner, i.e., either by selling it or by using the same for the generation of future economic benefits to recover unpaid taxes.

Example

Mr. Mark didn’t clear his income tax liability of $ 1,00,00 for 2018. The income tax department had served notice for payment of the tax liabilities. Even then, Mr. Mark didn’t clear his tax dues. Now the tax department will create a lien over any asset of Mr. Mark, say, for example, against his house property. Even after the creation of the tax lien, if Mr. Mark didn’t clear his tax dues, the department would seize it and ultimately sell the property against the tax deed document. If the property realizes $ 1,50,000 from sale proceeds, the department will recover its $1,00,000 and surrender $ 50,000 to Mr. Mark. Since the motive is to recover tax dues, any excess amount will be repaid to the property owner.

How to Invest in Tax Deeds?

Whenever a taxpayer defaults in payment of property taxes on time, countries create a tax lien, seize the property, and ultimately sell the property to recover delinquent taxes. Generally, countries sell the property through auction mode. Property is sold at a value lower than the normal valuation and attracts a large investor. Anyone interested in buying property via tax deed may attend the auction and place bids according to their potential. The highest bidder gets the allotment of property subject to payment of the bid amount within 72 hours of the auction. Once after getting an allotment, the owner’s sole description is to either keep the property for sale in the future or immediately realize cash.

Tax Deed Sale

Tax Deed Sale is nothing different than selling any seized property generally via auction sale mode of tax defaulter under a legal document that transfers ownership of a property from the tax defaulter to the prospective buyer to recover unpaid taxes.

Tax Lien vs. Tax Deed

Tax Lien is a charge created against a taxpayer’s property against non-payment of taxes and duties on time. This charge does not transfer the right of ownership from the tax defaulter to tax authorities or any other person. Still, it creates a charge/ right on any amount or economic benefit realized from sale proceeds. The tax lien is similar to a mortgage and is simply a public record of debt that restricts the owner from selling or creating a charge on a property unless debts are repaid.

A tax deed is a document that transfers the ownership of any property from the owner to government authorities due to non-payment of taxes due. A sale transaction undertaken against such properties is known as Tax Deed Sale.