Economists' Outlook

Housing stats and analysis from NAR's research experts.

The Importance of Paying Property Taxes

Property taxes are a very important part of homeownership. Homeowners can either have the taxes added to their mortgage statements that the lender deposits in an escrow account or they can pay them separately but it’s important to pay them. Governments assess property taxes based on location and value. Property taxes paid by homeowners are used by counties and states to provide critical services and infrastructure such as police services, fire services, schools, roads and highway construction, and other uses that vary by jurisdiction. 

As home prices continue to rise which means higher property taxes, it is important that homeowners pay property taxes because failure to pay tax results in the local government imposing a tax lien on your property that has to be paid within a certain period or else the property gets foreclosed.

Property Taxes by State

Below is a chart with census data from 2017, that shows property taxes and how much they account for the percentage of state revenues. We can see which states depend more on property taxes than others. Alabama, Delaware, New Mexico, Hawaii, Arkansas are the top 5 states with the lowest percentage to revenue. Rhode Island, Connecticut, Vermont, New Jersey, New Hampshire are the 5 highest percentage to revenue. Alaska, Wyoming, South Carolina, Alabama, and Utah were the top 5 states that had the lowest percentage to tax. Illinois, Maine, Maryland, District of Columbia, Connecticut were the top 5 states that had the highest percentage to tax.

States Percentage to Revenue States Percentage to tax
Alabama 9.8% Alaska 37.4%
Delaware 11.6% Wyoming 48.2%
New Mexico 11.6% South Carolina 53.5%
Hawaii 12.5% Alabama 56.6%
Arkansas 12.7% Utah 57.7%
Oklahoma 12.7% Oregon 59.6%
Louisiana 14.4% Kansas 60.5%
Kentucky 14.7% New Mexico 60.6%
Utah 14.7% Delaware 61.2%
West Virginia 15.0% Iowa 61.3%
North Carolina/td> 15.4% Mississippi 61.6%
Nevada 16.5% Florida 61.7%
Tennessee 17.0% Oklahoma 61.7%
Mississippi 17.0% West Virginia 62.4%
Indiana 17.2% North Carolina 62.7%
North Dakota 17.3% Michigan 63.3%
Missouri 17.8% Indiana 64.5%
California 17.9% Washington 64.8%
Washington 18.2% Colorado 65.2%
South Carolina 18.3% Virginia 65.4%
Idaho 18.6% Missouri 65.6%
Oregon 18.7% Tennessee 66.0%
Ohio 18.9% Texas 66.5%
Minnesota 19.0% Hawaii 66.9%
Alaska 19.3% Ohio 67.1%
Iowa 20.1% Idaho 67.9%
Maryland 20.1% Arkansas 68.8%
Kansas 20.2% California 68.8%
Colorado 20.6% Georgia 68.8%
Pennsylvania 21.1% Kentucky 68.8%
Georgia 21.4% South Dakota 68.9%
Michigan 21.4% Nebraska 69.0%
Wyoming 21.4% Louisiana 69.0%
Arizona 21.9% Montana 69.1%
Florida 22.5% Wisconsin 69.1%
Virginia 22.5% Arizona 69.3%
Wisconsin 23.4% North Dakota 69.5%
New York 24.5% Pennsylvania 71.2%
South Dakota 26.2% Rhode Island 72.0%
Nebraska 26.4% New Hampshire 72.3%
District of Columbia 27.0% Nevada 73.4%
Massachusetts 27.7% Minnesota 73.6%
Montana 27.9% Massachusetts 74.7%
Illinois 29.9% Vermont 75.2%
Texas 29.9% New York 76.6%
Maine 31.1% New Jersey 76.8%
Rhode Island 31.2% Illinois 76.9%
Connecticut 32.9% Maine 77.2%
Vermont 33.2% Maryland 77.9%
New Jersey 36.1% District of Columbia 82.7%
New Hampshire 48.9% Connecticut 83.2%

Source: US Census

How Property Tax Liens Work

When a homeowner fails to pay their taxes, the local government imposes a tax lien on your property. A tax lien is a claim on the owner’s property. When a homeowner fails to pay their taxes after 12 months the county will then create a certificate for the amount of the unpaid taxes. The certificates are then sold to individuals or investors so that the unpaid property taxes are monetized. Therefore, investing in tax lien certificates help to support states maintain police, fire departments, hospitals, and other necessities. There are three major parties involved in these transactions, the homeowner, investor, and the courthouse. These certificates are bid on, either by bid down auction where the interest rate is lowered per bid or a premium bid or bid up where the winner is the highest bidder. Individuals who want to invest their money have paid for the certificate because the interest imposed on the unpaid tax is now received by the investor rather than the local government.  Moreover, after the redemption period, they are able to begin the foreclosure process and possibly possess the property. If this process is done with sound research and proper paperwork, the owner of the lien can then control the ownership rights to the property. While foreclosure is an option, it is in the interest of the owner and the mortgage originator to work together to so that the owner is able to pay the taxes before the redemption period because a tax lien takes precedence over the lien of the mortgage lender. The tax foreclosure window is typically a 60-day period to get letters out to all parties invested in the property. Those who wish to foreclose will need to also produce a deed application that carries a fee as low as $39 but can be up to $875 in some states but differs per state. If the foreclosure process is complete then the investor would be able to get a property free and clear just for the fees paid in taxes which would be a great investment.

Chron.com reports that tax lien states are Alabama, Arizona, Colorado, Florida, Illinois, Indiana, Iowa, Kentucky, Maryland, Mississippi, Missouri, Montana, Nebraska, New Jersey, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Vermont, West Virginia, and Wyoming. The District of Columbia is also a tax lien jurisdiction. Below is a table from the secrets of tax lien investing that shows which lien types are available, the interest by state as well as the redemption period for each state. Illinois has the highest interest on tax liens of 36% followed by Iowa at 24%. Indiana, Missouri, Montana, and South Dakota have the lowest interest rate of 10% which is added to unpaid taxes. The redemption periods are also typically less than three years.

State Tax Sale Type Interest Redemption
Alabama Tax Liens 12% 3 years
Arizona Tax Liens 16% 3 years
Colorado Tax Liens 11% 3 years
Florida Tax Liens & Deeds 18% 2 years
Hawaii Redemption Deeds 12% 1 year
Illinois Tax Liens & Tax Deeds 36% 2 or 3 years
Indiana Tax Liens & Tax Deeds 10% 1 year
Iowa Tax Liens 24% 2 years
Kentucky Tax Liens 12% 1 year
Louisiana Redemption Deeds 12% 3 years
Maryland Tax Liens 18% 6 months/2 years
Massachusetts Redemption Deeds 16% 6 months
Mississippi Tax Liens 18% 2 years
Missouri Tax Liens 10% 1 year
Montana Tax Liens 10% 2 or 3 years
Nebraska Tax Liens 14% 3 years
New Jersey Tax Liens 18% 2 years
New York Tax Liens & Tax Deeds 20% N/A
Ohio Tax Liens & Tax Deeds 18% 1 year
Oklahoma Tax Deeds N/A N/A
Rhode Island Redemption Deeds 16% 1 year
South Carolina Tax Liens 12% 1 year
South Dakota Tax Liens 10% 3 or 4 years
Tennessee Redemption Deeds 12% 3 years
Texas Redemption Deeds None 6 months/2 years
Vermont Tax Liens 12% 1 year
West Virginia Tax Liens & Tax Deeds 12% 18 months
Wyoming Tax Liens 15% 4 years

Source: Tax Policy Center

While investing in tax liens can be profitable for investors or individuals who desire to grow their money, it is devastating for homeowners because of the steep interest rate. As property values rise so will property taxes. The lesson for homeowners: make sure you keep current on your property tax payments because of the steep interest rates that accrue once the state sells your tax lien. As a homeowner it’s important to be vigilant in paying your property taxes to take care of your asset and avoid paying more in interest on unpaid taxes.

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