How a tax lien certificate works
When property taxes go unpaid, the county still needs the money. In many states, it gets it by auctioning a tax lien certificate: an investor pays the overdue taxes, and in return gets the right to be repaid by the owner with interest or a penalty set by state law.
- The homeowner keeps the house and can still live in it. They "redeem" by paying the county the back taxes plus interest, and the county pays the investor.
- If the owner doesn't redeem within the redemption period, the investor can start the process to get a deed, through a court or a county tax deed sale depending on the state.
- Most liens are redeemed, so most investors end up collecting interest, not houses.
The other states sell the property itself at a tax deed sale. Our explainer on tax lien vs. tax deed covers the difference.
Tax lien rules in the major lien states
| State | Maximum return | How bidding works | Redemption / path to deed |
|---|---|---|---|
| Florida | 18% a year | Bid down the interest rate; 5% minimum unless bid at 0% | Holder can apply for a tax deed after 2 years; the property is then auctioned. Certificates expire after 7 years |
| Arizona | 16% a year (simple) | Bid down the interest rate | Holder can sue to foreclose after 3 years; certificate void after 10 |
| Illinois | Penalty of up to 18% per 6 months | Bid down the penalty rate | Generally 2.5 years, never more than 3; then petition for a tax deed |
| Iowa | 2% a month (24% a year) | Bid down the percentage of ownership | After 1 year 9 months, notice of expiration; owner has 90 days to redeem |
| New Jersey | 18% a year, plus a 2%–6% redemption penalty | Bid down to 0%, then cash premiums | Holder can foreclose the right of redemption after 2 years |
| Colorado | 13% for 2026 (14% in 2025) | Premium bidding; premium earns no interest | Holder can apply for a treasurer's deed after 3 years |
| Indiana | 10% of the minimum bid within 6 months, 15% within a year | Premium bidding; overbid earns 5% a year | 1-year redemption, then petition for a tax deed |
| Maryland (Baltimore City) | 12% for owner-occupied homes, 18% for other property | Varies by county | Holder can file to foreclose after 6 months; certificate void after 2 years without filing |
Colorado's rate is reset every year at the Federal Reserve discount rate on September 1 plus 9 points, then fixed for the life of the certificate. Several states not listed here also sell liens, including Alabama, Mississippi, Nebraska, Wyoming and parts of Ohio. Their rules change often, so check the county treasurer's sale page.
Why real returns are much lower
The maximum rate is what the law allows, not what you'll earn. At most big auctions:
- Bid-down states (Florida, Arizona, Illinois, New Jersey): institutional buyers and funds bid rates down sharply on attractive properties, often to a few percent or even 0%. In Florida, a lien bid at anything above 0% still earns at least 5% if it's redeemed, which is why many bids land just above zero.
- Premium states (Colorado, Indiana, Maryland, New Jersey after 0%): you pay extra above the tax amount to win, and that premium earns little or no interest. In New Jersey a premium earns nothing and is forfeited to the town if the lien isn't redeemed or foreclosed within five years.
- Iowa keeps the full 2% a month, but investors compete by accepting a smaller share of ownership if the property isn't redeemed.
Certificates the auction doesn't sell are often available later "over the counter." In Arizona the county must assign them to anyone who pays the amount due. In Florida, properties that go through a deed sale with no bidders go on the clerk's "lands available" list.
The risks
- Worthless property. Many unsold liens are on vacant slivers of land, landlocked lots, contaminated sites or condemned buildings. The lien is only as good as the property.
- Bankruptcy. If the owner files, the automatic stay freezes your deed application or foreclosure. Courts have also limited the holder to the auction rate rather than the statutory maximum.
- Federal tax liens. An IRS lien filed against the owner may survive a nonjudicial sale unless the IRS got written notice at least 25 days ahead, and the IRS can redeem the property for 120 days after the sale.
- Deadlines. Miss your state's window and the certificate expires: 7 years in Florida, 10 in Arizona, 2 years without foreclosure in Maryland.
- More money in. You usually have to pay later years' taxes to protect your position, plus legal and notice costs to get a deed.
- Title problems. A deed from a tax sale is often uninsurable until a quiet title action is finished.
- Surplus rules. After the Supreme Court's 2023 decision in Tyler v. Hennepin County, governments can't keep the owner's equity above the tax debt. States are rewriting their foreclosure rules as a result, which changes the economics of getting a property through a lien.
If your tax lien was sold
A lien sale doesn't mean you've lost your home. You still own it and can still live in it. What to do:
- Call the county treasurer or tax collector, not the investor, for the exact redemption amount. You pay the county.
- Redeem as early as you can. Interest or penalties grow over time: in Illinois the penalty doubles after six months, and in Iowa interest runs at 2% a month.
- Know your deadline. At the end of the redemption period the investor can move to take the property: as early as 6 months in Maryland, about 2 years in Florida and New Jersey, and 3 years in Arizona.
- Ask about help. Payment plans, senior deferral programs and hardship programs exist in many states. Iowa counties can even redeem owner-occupied homes for people who can't pay. See property tax deferral for seniors and help for low-income seniors.
- If the home is sold anyway, you may be entitled to the surplus above what was owed. Claim it on time.
Our guide to what happens if you don't pay property taxes walks through the whole timeline, and how to check for liens shows how to find out whether a lien has been sold on a property.
Sources
Florida: Fla. Stat. §§ 197.172, 197.432, 197.472, 197.482 and 197.502. Arizona: A.R.S. §§ 42-18053, 42-18114, 42-18122, 42-18127 and 42-18201. Illinois: 35 ILCS 200/21-215, 21-350 and 21-355, and the Cook County Clerk. Iowa: Iowa Code §§ 446.16, 447.1 and 447.9. New Jersey: N.J.S.A. 54:5-32 and 54:5-61, as described by municipal tax sale notices. Colorado: C.R.S. § 39-12-103 and the Jefferson and Larimer county treasurers. Indiana: IC 6-1.1-25 and Hamilton County. Maryland: Tax-Property § 14-833, the Baltimore City Code and the Maryland Department of Assessments and Taxation. Federal: 26 U.S.C. § 7425 and Tyler v. Hennepin County, 598 U.S. 631 (2023). This is general information, not investment or legal advice.