If a property has been sold at a tax auction, the owner and other interested parties may be entitled to collect the tax sale overage. If you're a homeowner or real estate investor and are interested in learning how the tax sale overage process works, continue reading to understand what tax sale overages are, who can claim a tax sale surplus, when you can apply to claim any tax sale surplus, and how to apply for surplus funds.
What is a tax surplus or tax overage?
If a property has delinquent tax, the county tax collector will issue a tax lien on the property as an attempt to recoup the past-due taxes. Eventually, if the defaulting taxpayer fails to pay the past-due taxes, the property will go to tax deed sale at a public auction. At the delinquent-tax sale, the property is sold to the successful bidder, which for most treasurer's offices is the highest bid above the delinquent property tax plus penalties, fees, or assessments.
When a property is sold at a tax foreclosure sale for more than the total delinquent tax amount, any excess funds over that amount are placed into an overage account, which can be claimed and collected by interested parties such as the property owner, heirs of an estate, or even the mortgagee, depending on the circumstance.
Who can claim a tax sale surplus?
State law defines who has the right to collect tax surplus after a sale, which in most states defaults to the property owner at the time of the auction. There are some states that do not offer tax sale overages at all; in those cases, the state becomes the rightful owner after the sale regardless of whether or not there is an overage. Meanwhile, in other states, parties who have recorded equitable interest, such as an heir or a lender of a mortgage, may also have a right to collect any overage money in certain circumstances.
As an example, let's say a state allows equitable parties the right to overages and the property owner owes $65,000 on their mortgage and $18,000 in property taxes. The property sells for $100,000 at auction. After paying sale fees to the tax collector for conducting the sale, $80,000 is placed into the overage fund. Since there is a recorded first lien mortgage on this property, the lender has the right to claim up to the balance of the mortgage, which in this case would be $65,000. The remaining money ($15,000) would be payable to the previous owner as long as the previous owner files a claim to collect the funds.
When can I apply to claim a tax sale surplus?
Tax law varies from state to state and sometimes county to county, so certain variants will affect the period of time one has to apply to claim these funds and the process for collecting the funds.
If the state has a redemption period -- which is the period of time allotted after the sale for interested parties, such as the property owner or mortgagee, to redeem the sale by paying a specified amount to the winning purchaser or county treasurer -- then overages cannot be applied for until that period has ended. Certain states will also limit the amount of time that money can be claimed, which can be as little as one year and up to 10 years, while other states have no limits at all.
For example, in South Carolina, tax sale overages belong to "the owner of record immediately before the end of the redemption period" and are available to be claimed and payable "ninety days after execution" of the tax sale deed. A property owner or lienholder with rightful interest must collect any money within five years from the tax auction date.
In Georgia, however, tax sale overages belong to the owner of record on the security deed or any other party with recorded equity interest, such as a lien holder. The interested party can file a claim anytime after the auction date. If multiple claims are filed, funds are paid in the order interest appears and in the order of priority in which their interest exists as determined by the court.
How can the owner file a claim for the tax sale surplus?
As previously mentioned, the process for an owner to file a claim will vary from state to state and county to county. For some counties, if there are overage funds, the county treasurer's office will mail a certified letter to all interested parties notifying them of excess sale funds and the process to apply and collect the money according to the county or state law.
Other counties' tax commissioners require any interested parties to apply by mail or fax without any formal notice that there are overages from the sale.
Using tax sale surplus as an investment
There are some advocates for using tax sale overages as an investment strategy, but in my personal opinion, this method of buying or selling real estate is a risky endeavor.
In the real estate investing space, some investors talk about the opportunity to help property owners claim surplus funds, and they earn a fee or percentage of the overage checks. However, this practice is highly frowned upon in the legal community and can be seen as predatory in certain states. Many counties strictly prohibit the application or negotiation of any surplus funds with anyone other than recorded interested parties or previous property owners.
Another investing strategy suggests marketing to property owners who are at risk of losing their property to tax foreclosure, negotiating an extremely low purchase price using a quitclaim deed to place themselves on the title before the sale. Once the property goes to auction, they would then have the right to collect any overages, assuming there is some.
While these strategies likely are practiced, they are risky and assume that properties will be bid up high enough to have money to collect in the first place, which in many cases doesn't happen.
As you can see, the tax sale overage process can be confusing at times. Your right to collect any overages and the process you must follow to claim them will greatly depend on the location of the property and the state you reside in. If you feel you may have a right to surplus money from a tax sale, contact your local treasurer to see if they have a list of excess funds, and speak with a licensed professional before working with anyone to help you through the process of making a claim.
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