Tax Deed

Tax Deed Definition

Tax Deed is a legal document which transfers absolute title in the ownership of any property like land, building, vehicle or any other movable or immovable property from owner to government authorities due to non-payment of taxes due (like property tax) by the taxpayer generally undertaken with the motive of collecting delinquent taxes.

Explanation

All taxpayers are required to pay taxes due, and file returns as per the timelines decided by the government on time comply with the prevailing regulations. If any taxpayer fails to pay any taxes on time, 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 lien simply notifies the government’s first right against sale or realization from that asset. However, if a taxpayer does not repay tax dues even after creating a lien against the property, the government gets the right to seize the property. Once after a property is seized, the government will call for auction and sell the attached property. The complete process is organized just for the motive of the collection of delinquent taxes.

Tax Deed

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Tax Deed Process

It is the duty of every taxpayer to pay taxes and duties levied by the government on time as and when they fall due. However, sometimes due to various reasons say, for example, under financial distress conditions, the taxpayer may not be in the condition 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 of demand notice, if the taxpayer fails to prepay taxes, the government will create a lien known as 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 government organization.

Tax lien simply creates first right against any economic benefit realized from that asset. At this stage also, the taxpayer has the option to repay taxes and get his/ her property released from the tax lien. After the creation of charge, the taxpayer may go for declaring himself bankrupt and take the proceedings further. If tax still remains unpaid, then the government will take the further step and seize the property against which 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 for the purpose of recovering unpaid taxes.

Example

 Mr. Mark didn’t clear his income tax liability of $ 1,00,00 for the year 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 tax lien, if Mr. Mark didn’t clear his tax dues, the department will seize it and ultimately sell property against the tax deed document. Now, say if property realizes $ 1,50,000 from sale proceeds then, the department will recover its $1,00,000 and surrender $ 50,000 to Mr. Mark. Since motive is just to recover tax dues, any excess amount recovered will be repaid to the owner of the property.

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 in order to recover delinquent taxes. Generally, countries sell the property through auction mode. Property is sold at a value lower than the normal valuation and therefore attracts a large investor. Any person who is interested in buying property via tax deed may attend the auction and place bids according to his/her potential. The highest bidder gets the allotment of property subject to payment of bid amount within 72 hours of the auction. Once after getting an allotment, its sole description of the owner to either keep the property for sale in the future or immediately realize cash.

Tax Deed Sale

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

Tax Lien vs. Tax Deed

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

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

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