Did you know that over $22 billion in property taxes goes unpaid annually in the U.S.? When property owners fall behind, local governments use two main tools to recover those funds:
- Tax liens
- Tax deeds
While both serve the same purpose (recovering unpaid property taxes), their legal processes, financial outcomes, and risks differ. Many people lose money or face legal trouble simply because they didn’t know the rules.
In this guide, we will explain everything a property owner or investor should know about tax liens vs. tax deeds.
We’ll break it all down step-by-step. By the end, you’ll know which is safer, which is riskier, and which could make (or lose) you money.
What Are Tax Liens?
| A tax lien is a legal claim by a government (usually the Internal Revenue Service (IRS) or a state taxing authority) against your property when you fail to pay a tax debt. It is a public notice to creditors that the government has a priority interest in your assets until the debt is resolved. |
Remember that a tax lien does not mean the IRS is seizing your property yet—that would be a levy. However, a lien can quickly spiral into wage garnishments, asset seizures, and long-term financial damage.
Once placed, many municipalities sell these liens at public property auctions to recover the unpaid taxes quickly.
Bonus: Liens on Property Search
How Tax Liens Work?
Tax liens explained step by step:
- Step 1: The IRS or state tax authority reviews your records and identifies unpaid taxes from unfiled returns, audits, or underpayments.
- Step 2: You receive a Notice and Demand for Payment (like IRS CP14) demanding full payment of the assessed tax by a specific due date.
- Step 3: If you don’t pay or set up a payment plan, the IRS sends more notices, such as the Intent to Levy (Letter 1058).
- Step 4: A tax lien is officially filed, and a Notice of Federal Tax Lien (NFTL) is recorded publicly, showing the government’s legal claim on your current and future assets.
- Step 5: The IRS becomes a priority creditor as the lien puts the IRS ahead of other creditors and can lead to aggressive collection actions, like levies or wage garnishments.
- Step 6: The lien is sold at a public auction. Investors purchase the lien by paying the full amount of taxes owed.
- Step 7: The homeowner must now repay the investor, not the government. This includes the tax amount plus interest, often depending on state laws.
- Step 8: If the homeowner repays the investor in time (usually within a redemption period), everything ends there.
Suppose the homeowner does not repay the debt during the redemption period (which varies by state, usually from 6 months to 3 years). In that case, the lienholder may initiate a foreclosure process to gain property ownership.
This makes tax liens attractive to you if you’re an investor looking for strong investment returns without directly purchasing property.
Know More → Ultimate Guide: Removing and Avoiding Tax Liens on Your Property
What Are Tax Deeds?
| A tax deed gives property ownership to a new buyer after the original owner fails to pay property taxes and the government forecloses on the home. |
The government takes title to the property and then sells it at a tax deed auction to recover the unpaid taxes.
The key difference here is that with a tax deed, the buyer at the auction gets ownership of the property, not just the right to collect a debt.
How Tax Deeds Work?
Let’s say a homeowner hasn’t paid property taxes for an extended period.
Step 1: The property owner fails to pay taxes even after multiple notices.
Step 2: The local government may place a tax lien on the property. If the taxes remain unpaid, the government can initiate foreclosure proceedings to recover the owed amounts.
Step 3: If the property owner continues to neglect their tax obligations, the government has the right to foreclose on the property and sell it at a tax auction to recover the unpaid taxes.
Step 4: The highest bidder receives full legal ownership of the property.
Some states offer a short redemption period, allowing the original owner to reclaim the property. However, in many cases, the buyer takes possession immediately after the auction ends. You buy it. You own it.
Unlike tax liens, this method involves direct ownership, making the process more complex and potentially more profitable, but also riskier.
Some properties have title problems or old mortgages, some homes are vacant, and others are falling apart. So, even though tax deeds sound exciting, there’s risk too.
Differences Between Tax Liens and Tax Deeds
As a property owner, it’s important to know how tax liens and tax deeds can impact your rights. The table below breaks down the key differences, so you can understand what happens if your property becomes involved in either process.
| Feature | Tax Liens | Tax Deeds |
| What You Acquire | Right to collect the debt (not the property) | Actual ownership of the property |
| Initial Investment | Typically lower (just the tax amount owed) | Higher (purchasing the entire property) |
| Return on Investment | Fixed interest rate (typically 8-36%, depending on state) | Potential property equity (often 30-70% below market value) |
| Ownership Status | The property owner retains ownership during the redemption period | Ownership transfers to you at the time of purchase (in most states) |
| Time to Return | Redemption period (typically 6 months to 3 years) | Can be immediate if you sell the property, or ongoing if you rent it |
| Risk Level | Lower risk (limited to tax amount invested) | Higher risk (property condition, title issues, etc.) |
| Property Condition | Not relevant unless foreclosure occurs | Extremely important as you’re buying the actual property |
| Due Diligence Required | Research on property value and the owner’s financial situation | Comprehensive property inspection, title search, lien search, etc. |
| Exit Strategy | Collect payment plus interest, or foreclose if not paid | Sell the property, rent it out, fix and flip, etc. |
| Legal Complexity | Moderate (complex if foreclosure becomes necessary) | Higher (dealing with title issues, potential evictions, etc.) |
| Management Required | Passive (minimal after purchase until the redemption period ends) | Active (property management, repairs, etc.) |
| Primary Benefit | Steady interest income | Property acquisition at below-market prices |
| Tax Treatment | Interest income is taxed as ordinary income | Various real estate tax benefits may apply (depreciation, etc.) |
| Foreclosure Process | The investor must initiate foreclosure if the owner doesn’t pay | The government has already foreclosed before the tax deed sale |
| Competition Level | Often high for “good” liens in popular markets | Varies by location and property condition |
| Best For | Investors seeking passive income with lower risk | Real estate investors looking to acquire properties |
| Typical Investor Profile | More conservative, income-focused investors | More aggressive, growth-focused real estate investors |
| Scalability | Can purchase many liens with relatively small capital | Requires substantial capital to purchase multiple properties |
| Required Expertise | Understanding of tax lien laws and redemption periods | Real estate knowledge, renovation skills, and property management |
If you’re interested in passive income, you may prefer tax liens. If you’re willing to take on more risk for greater reward, tax deeds could be a better fit.
Pros and Cons of Tax Liens
Let’s look at what’s good and bad about tax lien investments.
Pros:
- Lower initial investment: Requires less capital as you’re only paying the delinquent tax amount
- High interest rates: Typically earn 8-36% interest, depending on state laws
- Government-backed security: The investment is secured by real property
- Lower risk profile: Risk is limited to your invested amount
- Passive income potential: Minimal management required during the redemption period
- Property acquisition possibility: Opportunity to acquire property if the owner defaults
- No property management headaches: No need to handle tenants or repairs while holding the lien
- Diversification option: Can purchase multiple liens across different areas with modest capital
- Predictable returns: Interest rates are fixed by law in most jurisdictions
- Less competition in some markets compared to traditional real estate investing
Cons:
- Long waiting periods: Redemption periods can last 6 months to 3 years
- No guaranteed property acquisition: Most property owners (70-80%) eventually pay their taxes
- A complex foreclosure process if the owner doesn’t redeem the lien
- Research intensive: Requires thorough due diligence before purchasing liens
- Limited control over investment outcome during the redemption period
- Return limited to interest rate: The Profit ceiling is capped at the statutory interest rate
- Specialized knowledge required of local tax laws and procedures
This is why you must understand the tax lien investment risks before diving in.
Also Know → How to Buy Tax Lien Properties in Florida: A Complete Guide
Pros and Cons of Tax Deeds
Now let’s look at tax deeds; they sound exciting, but are they worth the risk?
Pros:
- Immediate property ownership in most states (non-redemption states)
- Significant discount on properties (often 50-70% below market value)
- Higher profit potential through property appreciation or rental income
- Multiple exit strategies, like selling, renting, improving it, or holding the property
- Full control over the asset and its development
- Traditional financing options are available after acquiring a clear title
- Tax benefits of real estate ownership (depreciation, expenses, etc.)
- Leverage opportunities after the acquisition for further investments
- Portfolio building potential for long-term wealth creation
Cons:
Risks of buying tax deed properties are as follows:
- Lack of property inspections: Buyers often cannot inspect the property before the auction.
- Title concerns: The property may have other hidden debts or legal problems.
- Physical condition: The home may be vacant, vandalized, or severely damaged.
- Eviction risks: Buyers may need to evict current residents, which involves legal processes.
For these reasons, if you’re new to real estate investing, starting with tax liens may be easier to manage.
Which Investment Is Right for You?
Choosing between tax liens vs. tax deeds depends on your financial strategy. Looking ahead:
Which is Right For You? Tax Liens vs. Tax Deeds | |
|---|---|
| Consider Tax Liens If You: | Consider Tax Deeds If You: |
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Get Expert Guidance from Salinger Tax Consultants
If you own property or want to invest in real estate, understanding tax liens vs. tax deeds is essential. They may sound similar, but the process, payoff, and problems are all very different. But navigating these legal terms and local rules isn’t always easy. That’s where Salinger Tax Consultants comes in.
We break down the process, help you avoid costly mistakes, and provide clear, expert advice. We’ll guide you through your next auction—whether it’s liens, deeds, or anything in between. With deep experience and trusted advice, we ensure you stay protected and informed.
FAQs
What steps can I take if I receive a tax lien notice?
If you receive a tax lien notice, don’t panic. First, verify the amount owed with your local tax authority. Then explore payment options, including installment plans, property tax hardship programs, or loan options.
Many jurisdictions offer assistance programs for seniors, veterans, and low-income homeowners. Contact your tax assessor’s office immediately. Addressing the issue early can prevent the lien from being sold to investors and save you from paying additional interest and fees.
How long do I have to pay off a tax lien before risking foreclosure?
The redemption period varies by state. Most states allow 1-3 years to pay off a tax lien before you risk losing your property. Florida gives property owners 2 years, while Arizona allows 3 years.
During this period, you’ll need to pay the original tax amount plus interest (typically 9-15%, depending on your state) and any penalties. Remember that the clock starts ticking from the date the lien is sold at auction, not from when you receive notification.
Will a tax lien affect my credit score?
Yes, tax liens can significantly impact your financial health:
- They appear on credit reports, potentially lowering your score by 100+ points
- They make it difficult to sell or refinance your property
- They can prevent you from qualifying for new loans or credit cards
- They may trigger higher insurance premiums
The good news is that paying the lien promptly can minimize these effects. Once paid, request a “release of lien” document from your local tax authority to help restore your creditworthiness.
Can I still sell my home if it has a tax lien?
Yes, you can sell a property with a tax lien, but the process is more complicated. The lien must be satisfied from the sale proceeds before you receive any money. Options include:
- Pay the lien before listing the property
- Negotiate with the lienholder for a reduced payoff amount
- Include the lien payoff in your closing costs
- Consider a short sale if the property value is less than what you owe
Many buyers will be reluctant to purchase a property with a lien, so resolving it before listing is usually the best approach.
What's the difference between a tax lien and a levy?
A tax lien is a legal claim against your property that serves as public notice of your tax debt. It doesn’t take your property away, but makes it difficult to sell or refinance. A levy is the actual seizure of your property to satisfy the tax debt. The IRS typically issues a lien first, followed by a levy if the debt remains unpaid. While a lien is serious, a levy is more immediate and severe, potentially resulting in bank account freezes, wage garnishment, or physical seizure of assets, including your home.
