How Paying Someone’s Property Taxes Makes Money
Many investors make money by paying someone’s property taxes through purchasing either a tax lien or a tax deed. These investments are attractive because the government administers them, they typically have high return rates and they can lead to ownership of the property.
Counties need money to pay for local services like police and fire departments, public utilities and schools. Especially in Texas, where there is no state income tax, municipal governments rely on local property taxes for funding. When property owners are not paying property taxes, counties don’t get the money they need and must resort to selling either a tax lien certificate or a tax deed to recoup the loss in income.
Tax Lien Certificates Vs. Tax Deeds
In some states, counties sell tax lien certificates and, in others, tax deeds. Some states are hybrid states that allow both.
Common protest issues that provide property tax help for low-income taxpayers are:
- Tax lien auction. When investors make a winning bid at a tax lien auction, they purchase a tax lien certificate and pay someone else’s property taxes. They do not get possession of the property. After a certain amount of time, if the property owner still has not paid the property taxes plus interest and any penalties, the investor can foreclose on the property.
- Tax defaulted auction. At this type of auction, counties have seized the properties and are selling tax deeds to the highest bidder. In this case, the investor is buying the property.
There is a type of tax deed called a redeemable tax deed which is between a tax lien and a tax deed. Only seven states (and one city) sell this kind of tax deed, and Texas is one of them. After a redeemable tax deed sale, the owner can redeem their property by paying the bid amount plus a significant penalty or interest before the redemption period ends.
Delinquent Taxes on Property: Redeemable Tax Deeds in Texas
Although paying someone else’s property taxes in Texas doesn’t potentially lead to ownership of a property, as is the case with a tax lien certificate, a redeemable tax deed is a far more serious situation when you have delinquent taxes on a property. In Texas, the buyer of the tax deed is the legal owner of the property even before the redemption period ends.
This means that while waiting for payment of the penalty and property taxes owed by the previous owner, the new owner can evict anyone on the property – the previous owner only has redemption rights and only within the redemption period, which can range from six months to two years. There is no interest, but the penalty is hefty – 25% of the bid amount in the first year and 50% in the second year.
How to Find Out If Taxes Are Owed on a Property
If you need to know how to find out if taxes are owed on a property, be aware that property taxes are not public record in Texas. Contact each county’s tax office for information on delinquent taxes on properties in the county, how auctions are conducted and what is required for the auction process.
In all of Texas’ 254 counties, auctions are held on the first Tuesday of every month. Smaller counties may not have a monthly auction if there aren’t any property owners with delinquent property taxes severe enough for seizure and sale.