Anyone who owns property must pay some sort of real estate tax to the government. These taxes in turn fund numerous services, including hospitals, schools, law enforcement, road construction, parks and playgrounds. But, what happens if a real estate owner stops paying taxes? How does the county government recover this money to fund these types of services?
If a real estate owner does not pay the required taxes on a property, the county will offer the property up for sale at an auction as a "tax sale" to help generate the lost tax income. There are two types of tax sales—tax lien sales and tax deed sales. In tax lien sales, the county government sells their right to the tax lien on the real estate property, allowing the buyer to bid on the tax debt for a favorable return on investment. In tax deed sales, the county government sells full ownership and possession rights of the property to the investor. Both result in a flexible and secure investment with minimal market risk.
Tax lien sales
When bidding on a tax lien sale, you are not bidding on the deed to the property, but on the tax debt. Basically, you are loaning money to the property owner to pay his or her taxes. Usually, the respective county holds a public sale, such as an auction, for the right to collect on the delinquent taxpayer's debt. This can be a lucrative investment, as a property tax lien is usually sold for a small fraction of a property's market value. The purchaser pays the delinquent taxes to the county on behalf of the delinquent property owner. In exchange, the purchaser is given first lien position on title, ahead of mortgages, deeds of trust, and other private liens, secondary only to state tax liens. The purchaser then receives a certificate of purchase or a "tax lien certificate."
Under the terms of the sale, the investor has the right to receive interest penalty charges when the lien is paid off by the delinquent property owner, many times at a high rate of 16 to 24 percent. The purchaser also has the right to foreclose the tax lien and take title to the property if the lien is not paid.
Usually, tax lien investing is a win-win for the investor:if the delinquent taxpayer pays off the late taxes, the investor will receive the principal paid for the lien plus any interest that has accrued. If the late taxes are not paid by a specified date, the investor can foreclose and take title to the property.
Tax deed sales
Unlike a tax lien sale, a tax deed sale is when the deed to the property of a delinquent taxpayer is auctioned. The winning bidder purchases the deed to the property, becoming the new owner and obtaining all of the rights to the property free of all liens, mortgages, deeds of trust, etc.
In a tax deed sale, the property is usually sold for the back tax amount plus any fees, interest charges, and court costs. Like a tax lien sale, investors purchasing a tax deed can acquire full property rights at a fraction of the market price, since property taxes are a small percentage of market value.
How do I find a tax sale?
If you are interested in participating in a tax lien or tax deed sale, probably the fastest way to find a sale is to contact your county government's office for specific information and details about potential sales and the properties involved. Once you find out what properties are for sale, you don't have to wait for a property's auction to begin the purchasing process. You may be able to use the list of tax sales from the county to find motivated sellers who want to sell their lien or deed before the auction. Or, you can get an old tax sale list and contact the new owners of the lien or deed to see if they are interested in reselling their purchase.
As with any real estate investment, proper research of a property involved in a tax lien or tax deed sale beforehand will minimize any risks that may arise. Before your purchase, be sure to view the property and research its value. In addition, it is important to research the title for current property, in addition to any tax, judgment and/or mortgage liens, and trust deeds.
Finally, know and understand which type of sale you are attending, a tax lien or tax deed sale. Each has specific rules and guidelines which must be followed, which can differ from county to county. In addition, not all states allow tax lien and tax deed sales, so it is important to investigate your particular state's tax laws before pursuing a tax sale.
Find out more about Estate Taxes
FAQs
Information from the New Jersey League of Municipalities and the State of New Jersey. A tax sale is the sale of property to collect payment of delinquent tax or other Municipal Charges. This is inclusive of Taxes, interest, costs of sale, water, sewer, electric, Assessments for Improvements, demolitions, board ups, etc ...
What does it mean when a property is in tax sale in NJ? ›
Tax sale is the enforcement of collections against a property by placing a lien against the property for all outstanding municipal charges due at the end of the calendar year (December 30).
How do I buy a tax lien property in NJ? ›
By law, you must pay the total taxes, penalties, and interest owed for each property. When you bid for properties, you are bidding on the interest you will receive while you hold the tax lien. Bidding starts at the statutory maximum rate of 18 percent and goes down. The person with the lowest bid wins the property.
What is the tax sale statute in New Jersey? ›
New Jersey's “tax sale law,” R.S.54:5-1 et seq., allows the holder of a tax sale certificate, whether it is a municipality or a private lienholder, the ability to foreclose the right of the property owner to redeem the lien by paying to the tax sale certificate holder all of the property taxes, plus interest, that the ...
How long can property taxes go unpaid in New Jersey? ›
After 2 years they may start to foreclose on the property. The homeowner has the right to redeem the tax sale certificate any time prior to the final judgment being filed.
Who can redeem a tax sale certificate in NJ? ›
The owner of a property, or a legally interested party (mortgagee, heir, etc), may redeem at any time as long as foreclosure has not begun. The legally interested party must prove to the Collector, upon request, their right to redeem.
Do you have to pay taxes on the sale of a house in NJ? ›
You will report any income earned on the sale of property as a capital gain. When filing your New Jersey Tax Return, a capital gain is calculated the same way as for federal purposes. Any amount that is taxable for federal purposes is taxable for New Jersey purposes.
Is NJ a tax lien or tax deed state? ›
In New Jersey, property taxes are a continuous lien on the real estate. Property taxes are due in four installments during the year: February 1, May 1, August 1, and November 1. Delinquency on a property may accrue interest at up to 8 per cent for the first $1,500 due, and 18 per cent for any amount over $1,500.
How many acres do you need to be farm assessed in NJ? ›
Additional Land Requirements: Additional Land Requirements: To be eligible for Farmland Assessment, land actively devoted to an agricultural or horticultural use must have not less than 5 acres devoted to the production of crops; livestock or their products; and/or forest products under a woodland management plan.
What is the sales tax rate in New Jersey? ›
New Jersey assesses a 6.625% Sales Tax on sales of most tangible personal property, specified digital products, and certain services unless specifically exempt under New Jersey law.
The New Jersey exit tax requires you to withhold either 8.97 percent of the profit/capital gain you make on the sale of your home or 2 percent of the total sale price: whichever is higher.
What types of items are subject to sales tax in NJ? ›
The New Jersey Sales and Use Tax Act imposes a tax on the receipts from every retail sale of tangible personal property, specified digital products, and the sale of certain services, except as otherwise provided in the Act. Tangible personal property can include prewritten computer software delivered electronically.
What is a short sale in NJ? ›
A short sale is when a homeowner sells a property at a price below what they still owe on the mortgage for the home.
Do you ever stop paying property taxes in NJ? ›
New Jersey does not have a provision that allows all seniors aged 65 or older to completely stop paying property taxes. However, New Jersey does have several programs aimed at providing tax relief for seniors, veterans, and others.
When did NJ get rid of estate tax? ›
On January 1, 2018, under current law, the New Jersey Estate Tax will no longer be imposed for individuals who die on or after that date.
Can you claim property taxes in New Jersey? ›
Residents of New Jersey that pay property tax on the home they own or rent, may qualify for a refundable tax credit or a deduction on their return. You may claim only one of the benefits.
What happens when a tax is placed on sellers? ›
When the tax is imposed, the price that the buyer pays must exceed the price that the seller receives, by the amount equal to the tax. This pins down a unique quantity, denoted by q A*. The price the buyer pays is denoted by p D* and the seller receives that amount minus the tax, which is noted as p S*.
What is a tax on the sale of investments or property? ›
Capital gains tax. A levy imposed by the IRS on profits made from the sale of an asset, such as stocks or real estate — that profit is considered taxable income. Long-term capital gains. A tax on assets held for more than one year. Property value.
Is NJ a tax deed state? ›
CONCLUSION. We hope you learned a lot from Ted's lesson, “Is New Jersey a tax lien or tax deed state?” New Jersey is a tax lien state, and New Jersey tax lien certificates pay a rate of 18% per annum. The auctions are a down bidding process.
