How to Calculate Tax Lien Redemptions

Tax liens make it possible for the lien holder to take possession if the owner doesn't pay.

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When a property owner does not pay his property taxes, the local taxing authority can take a lien against the property to secure payment of the taxes. The taxing authority can then sell these liens to the highest bidder at auction, with the winning bidder purchasing the right to own the property if the owner does not pay the taxes. The amount required to redeem the property from the lien depends on several variables, depending on the location of the property.

Interest Rate

The first factor in determining the amount of a tax lien redemption is to calculate the interest rate on the lien. Interest rates on tax liens are typically between 10 and 12 percent, with some states charging higher interest rates. For example, Connecticut offers 18 percent interest on tax liens, and Nebraska offers a 14 percent interest rate. In most states, the applicable interest rates on tax liens are set by law.

Bid Amount

Tax liens are typically sold at auction, where the right to own the property if the property owner does not pay the taxes is sold to the highest bidder. Often, the tax lien will sell for much more money than the amount of outstanding income taxes. The bid amount of the lien is the amount that the interest is calculated on. For example, if the state interest rate is 10 percent, and you purchase a property tax lien for $5,000, you have a right to collect $500 for the first year on the tax lien.

Length of Time

The length of time affects the total redemption amount for the tax lien. The interest rates quoted are for an annual basis. Some states give relatively short times for the homeowner to redeem the property, while others may give up to three years. For example, a lien with a value of $5,000 and a 10 percent interest rate would require interest of $500 at the one year mark. The homeowner must pay the amount of the original tax bill to redeem, plus the interest on the lien.

Penalties for Non-Payment

Some states allow the collection of a non-payment penalty in addition to the interest that is allowable. This penalty is generally payable to the lien holder as part of the redemption charges for the tax lien. Penalties for non-payment or slow payment of taxes are usually calculated as a percentage of the tax due. For example, the State on Indiana provides a 10 percent penalty of the unpaid taxes for non-payment in addition to any interest charges.

Bidding on Interest

The interest rates are fixed by state law in most states, and investors bid on tax liens by stating the amount that they are willing to pay for the lien. However, some states operate their auctions differently. The auctions can also be conducted by bidders offering lower interest rates for the liens instead of more money. The investor offering the lowest rate on the lien will win the auction and the right to collect that interest rate. This affects the redemption rate by whatever the winning bid interest rate is.