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What is a Tax lien sale?

What is a Tax lien sale?

A tax lien is a legal claim of the government against the property of a taxpayer for unpaid taxes. When a tax lien is issued against the property of a taxpayer, a tax lien certificate is usually filed by the internal revenue service, which is then auctioned off to interested individuals who bid for it in an auction, so as to pay off the tax debts and also to recover interest in the long run.

After a tax lien is imposed on a property, the tax lien certificate that was filed by the IRS is usually sold off to an investor in a tax lien sale. The tax lien issued usually is the sum total of all the taxes owed by that taxpayer plus additional interests from accumulated tax penalties and fines. This cumulative amount is the minimum amount that the  IRS will accept as a bid for the settlement of the property lien at the auction of a tax lien certificate.

A tax lien sale, therefore, refers to the sale of the property tax lien certificate that has been imposed by the IRS due to the property owner’s failure to pay the amount due in taxes. A tax lien sale usually involves auctioning the tax lien certificates of delinquent taxpayers, as it is the right of the government to enforce the collection of taxes from delinquent taxpayers. Without a way to enforce the taxes due, a lot of individuals will avoid paying their taxes; therefore by a tax lien sale, the IRS can be sure to collect the necessary tax debt of delinquent taxpayers. It also works because it forces a lot of property owners to pay up their tax when due simply to ensure that their property never gets listed in a tax lien sale.

What happens during a Tax lien sale?

During a tax lien sale, the tax lien certificates of the delinquent taxpayers will be auctioned off to investors who will bid on several amounts for the tax lien certificate. For investors, a tax lien sale is a profitable venture because they bid for the tax lien certificate with an amount that can pay off the tax debt of the delinquent taxpayer, and afterward, they decide the period of time within which the delinquent taxpayer must pay them back the total amount spent on the tax lien certificate plus added interest.

The investor that bids at a tax lien sale really has nothing to lose, this is because the investment can go either of the following ways:

  1. The delinquent taxpayer after the period of time given pays the investor the total amount demanded to prevent a foreclosure. This total amount demanded will include the price paid for the tax lien certificate plus any added interests desired by the investor. In this way, an investor that bids in a tax lien sale makes a good profit for buying off the tax lien from the government.
  2. If the delinquent taxpayer is unable to pay the amount demanded after the given period of time, the investor has the right to foreclose on the property and take the matter to the court of law. At this point, the law will most likely rule in favor of the investor and the ownership of the property on which a tax lien was imposed will be given to them. This way, the investor will get the property for a price far below the normal market price, making it a lucrative investment.

Due to the profitable nature of this investment, smart investors that know a lot about how to utilize a tax lien sale make good profits from the auction of a tax lien certificate.

The tax lien against a property mostly is the cumulative cost of the unpaid property taxes and other charges on the property. The summation of the owed amount then serves as the opening bid in a tax lien certificate sale. This is because the amount paid by the bidding investor is actually used to pay up all of the unpaid debts and charges against the property. Furthermore, the delinquent taxpayer is not be allowed to bid in the tax lien auction of their property.

Therefore, it is advisable for taxpayers to pay off any piling debt against their property before a tax lien sale is carried out. This is because, after a tax lien sale, you will have much more to pay back apart from the original tax debt. Additionally, interests are added on the amount as is desired by the tax lien buyer. And furthermore, there is a chance of totally losing the property if you are unable to pay the amount demanded by the investor.

To avoid this disadvantageous consequences of a tax lien sale, the IRS unusually sends a plethora of notices to the defaulting taxpayer to inform them of their tax debt and the possibility of a tax lien sale. The most important point for taxpayers to note is that they should always pay their taxes when they are due because trying to pay up after a tax lien sale can be much more difficult.

Facing a tax lien? We can help! Contact us now to begin the process of getting a tax lien taken off your property.

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Internet subscribers, users, and online readers are advised not to act upon this information without seeking the service of a professional accountant. Any U.S. federal tax advice contained in this website is not intended to be used for the purpose of avoiding penalties, of any kind, under U.S. federal tax laws.