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|
|New Mexico||11.6%||South Carolina||53.5%|
|South Dakota||26.2%||Rhode Island||72.0%|
|District of Columbia||27.0%||Nevada||73.4%|
|New Jersey||36.1%||District of Columbia||82.7%|
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|
|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.