Understanding Tax Delinquencies

          One of Florida's greatest attractions to residents who reside outside the state is the lack of any type of state income tax. In order to make up for the lack of state income tax, Florida imposes a sales tax on sales of a majority of goods and services. In addition, the state of Florida imposes a property tax on all real and personal property located within the state (with proper personal property tax limited to commercial uses).

          Real property taxes are assessed based on the value of the property determined by each county’s property appraiser effective as of the first of each year. For example, the valuation used for the 2010 real property tax is the valuation of your property as of January 1, 2010.  The actual amount of tax due is then computed by multiplying the value determined by the property appraiser less any applicable exemptions such as homestead or senior citizen, by the millage rate established by the various taxing authorities that have jurisdiction over your property. If you look at your tax bill, you will see that you are being taxed by various districts including Palm Beach County, the municipality in which you reside, various fire and other taxing districts and you also see matters contained on your tax bill which are generally not considered taxes, such as your solid waste expense.  Overall, taxes are usually assessed at between 2.5 and 3 mills (1/1000 of a penny) per $100.00 in value.

          Taxes become due as of January 1 of the year in which the taxes are being assessed. However, the taxes generally cannot be paid until November 1 of each tax year. The only exception to this rule is the quarterly tax payment plan. In order to induce early tax payment, the tax collector provides a discount or incentive if the tax bill is paid by November 30 of the tax year. This discount equals 4% off the total amount of the tax bill. Further discounts include 3% if paid in December, 2% if paid in January, and 1% is paid by the end of February. The full tax is due no later than March 31 of the subsequent tax year.

          If the taxes are not timely paid the property tax collector has the option to seek to sell a tax certificate representing your obligation to pay the taxes that have not been paid. As part of the tax sale process, the tax collector is entitled to collect from the property owner the cost of advertising the sale as well as interest on the taxes.

          The tax sale date is usually held the first week of June following the year the taxes come due. Florida conducts a reversed interest rate auction, and the person who bids the lowest interest rate is the person entitled to receive the certificate. Interest starts at 18% and may be bid down in increments of .25%. Generally, desirable properties and properties encumbered by a mortgage are frequently the most popular properties on which bids are received.  Properties which are not sold are then retained by the County and accrue interest at the maximum rate permitted by Florida law.

          Properties which are sold result in a tax certificate being issued in favor of the low bidder. Pursuant to Florida law, the low bidder is guaranteed a minimum of 5% return on their investment even if there bid amount is as low as .25%. In addition the 5% is guaranteed whether the tax is redeemed immediately or prior to tax deed sale.

          Once a tax certificate is sold the holder of this certificate is not permitted to contact the property owner to seek payment until April of the second year after the tax certificate is purchased. If the tax certificate holder breaks this rule, they may be barred from ever purchasing tax certificates in the future.

          Once two years expires, the holder of a tax certificate may apply to the County for a tax deed. Notice of application of the tax deed is then sent to the property owner as well as the holders of any mortgages on the property. The notice provides a minimum of 30 days for the owner or mortgagee to redeem the tax certificate by paying the then outstanding balance due.  If the outstanding balance is not paid the County will then issue to the tax certificate holder a tax deed giving that person title to the subject property.

          Tax deeds are not considered the basis for someone to hold marketable title to property. That is because there are many due process concerns about tax deeds and tax certificates. Therefore, in order for a tax deed holder to sell the property and provide good clear title, they must either obtain a deed from the original owner, or file an action to quiet title and obtain a court order in their favor. In addition, they have the option of waiting four years for clear title after the statute of limitations expires for the owner to file a challenge to the tax deed.

          Tax certificates are a big business in Florida. Counties routinely sell millions of dollars in certificates to large and small investors.  Many large financial institutions have found tax certificates to be a very profitable business. That is because most tax certificates are redeemed long before two years either by the owner or by a lender who has a lien on the subject property.

          In addition to the minimum 5% guaranteed tax certificates make a lot of sense in this market given that the returns on most investments are substantially less. In fact some investors bundle-up groups of tax certificates and sell them in the same manner that mortgages used to be sold in the securities market. This bundling of certificates has raised eyebrows by some financial experts who believe that this corrupts the system and encourages the same financial problems that occurred in the mortgage market. However, in my experience, financial institutions have been heavily involved in purchasing tax certificates for at least twenty years and I do not believe that this is a new phenomenon in their financial planning tools.

          For private investors, investing in tax certificates may be a way to obtain decent returns with minimal risk on smaller sums. Most tax certificates are in the $1000.00 to $10,000.00 range and with the guaranteed 5% return can be considered a good investment vehicle over other investments such as certificates of deposit. Of course there is no guarantee of payment, and the property you may receive when a tax deed is issued may be worth less than the tax certificate. This would include contaminated parcels, non-buildable parcels, or parcels of unusual shape. No one should invest in tax certificates without at least doing their homework with regard to the property, but if the fundamentals are valid the certificate may be a good option for some investors.