Legal Definitions - tax sale

A tax sale is a legal process where a government agency, such as a local county, state tax department, or the Internal Revenue Service (IRS), forces the sale of a property or a claim against a property (a lien) to recover unpaid taxes owed by the owner. This action is typically a last resort, taken only after a taxpayer has failed to pay their taxes for an extended period and other collection efforts have been unsuccessful.

There are generally two main types of tax sales:

• Property Tax Sale: In this common scenario, the actual property itself is sold at a public auction. The money generated from the sale is used to pay off the outstanding taxes, penalties, and administrative costs. Any remaining funds are typically returned to the original property owner or their other creditors. Often, the original owner is given a limited period after the sale, known as a redemption period, during which they can pay the auction buyer the amount they paid (plus any interest or penalties) to regain ownership of their property.
• Tax Lien Sale: Instead of selling the property directly, the government agency sells a tax lien, which is a legal claim against the property, to an investor. This investor essentially pays the outstanding tax debt to the government. The original property owner then owes the back taxes, plus interest and potentially other fees, directly to the investor. If the property owner fails to pay the lien holder within a specified timeframe, the investor may have the right to initiate foreclosure proceedings and potentially take ownership of the property.

Here are some examples illustrating how a tax sale might occur:

• Example 1 (Residential Property Sale): Sarah inherited her childhood home but struggled financially after losing her job. She fell several years behind on her property taxes to the local county. Despite receiving multiple notices and warnings, she couldn't pay the accumulating debt. As a result, the county initiated a property tax sale. Her home was put up for public auction, and an investor purchased it. Sarah then had a one-year redemption period to pay the investor the purchase price plus interest to reclaim her home, but she was unable to do so, and ownership transferred permanently to the investor.

  This illustrates a property tax sale because the physical property was auctioned off by the government to recover unpaid taxes, leading to a potential change in ownership if the original owner couldn't redeem it.

• Example 2 (Vacant Commercial Lot Lien Sale): A small business, "Green Thumb Nurseries," owned a vacant lot next to its main store, intending to expand in the future. However, due to an oversight, they neglected to pay property taxes on this specific lot for five years. The city decided to conduct a tax lien sale for the vacant lot rather than selling the property outright. An investment company purchased the tax lien, paying the city the outstanding taxes. Green Thumb Nurseries then had to pay the investment company the original tax amount plus a significant interest rate over the next two years to prevent the investment company from foreclosing on the vacant lot and taking ownership.

  This demonstrates a tax lien sale because the government sold the right to collect the unpaid taxes (the lien) to a third party, who then became responsible for collecting the debt from the property owner.

• Example 3 (Rural Land Property Sale): Mark owned a large parcel of undeveloped rural land that he rarely visited. He moved out of state and failed to update his mailing address with the county tax assessor. Consequently, he never received his annual property tax bills and accumulated a substantial amount of back taxes over several years. The state tax agency, after exhausting all attempts to contact him, initiated a property tax sale. The land was sold at a public auction to a developer who planned to build cabins. Mark only discovered the sale when he eventually visited the property and found new survey markers, by which time his redemption period had already expired.

  This example highlights a property tax sale where the actual land was sold at auction due to chronic unpaid taxes, resulting in a permanent loss of ownership for the original taxpayer.