Tax deed vs tax lien states.

In the United States, when a property owner doesn’t pay their property taxes, the local government needs a way to recover those unpaid taxes. States handle this in one of two primary ways: they are either tax lien states or tax deed states. Understanding the difference is essential if you're exploring tax sale investing.

Tax Lien StatesIn a tax lien state, the government does not sell the actual property. Instead, it sells the tax lien — that is, the legal claim the county has placed on the property for the unpaid taxes.
Here’s how it works:
When a property owner fails to pay property taxes, the county or municipality places a lien on that property. To get the funds they need without waiting for the property owner to pay, the government holds a tax lien sale. Investors attend these auctions and purchase the right to collect the unpaid taxes, plus interest and penalties from the property owner.
Once the investor buys the lien, they must wait through a redemption period — often one to three years, depending on the state — during which the property owner can pay off the taxes, interest, and fees. If the owner repays, the investor gets their money back plus interest, which can be quite high (in some states up to 18–36%).
If the homeowner fails to redeem the lien, the investor may be able to foreclose on the property and take ownership, although this varies by state and may require a legal process.
In essence, tax lien investing is typically about earning interest, not acquiring property — although foreclosure is sometimes a secondary option.

Tax Deed StatesIn a tax deed state, the local government takes a more direct approach. Instead of selling the lien, they eventually sell the property itself at a tax deed auction. This typically happens after giving the delinquent owner plenty of notice and time to pay.
At a tax deed auction, investors bid on the actual property. The highest bidder typically receives a tax deed, which either immediately or eventually gives them ownership of the property.
Some tax deed states still allow a short redemption period after the sale, during which the previous owner can reclaim the property by repaying all taxes and fees. But in many states, once the sale is complete, the winning bidder owns the property outright or after a quick quiet title process.
This type of investing is generally about acquiring real estate at a discounted price, whether to fix and flip, rent, or hold for long-term appreciation. However, it carries more risk than tax lien investing, because:

• You often buy properties sight unseen.
  
• There could be title issues or legal complications.
  
• Repairs or evictions might be necessary.
  

Key Takeaways

• Tax lien states allow investors to buy the debt attached to a property. If the owner pays up, the investor makes a profit through interest. If they don’t, foreclosure may become an option, though it's not guaranteed or easy.
  
• Tax deed states sell the actual property at auction. This offers the chance to acquire real estate below market value but involves more legwork, legal steps, and potential property-related risks.
  

In short:

• Tax lien investing is generally less hands-on and appeals to those looking for interest income with lower upfront capital.
  
• Tax deed investing is more hands-on and appeals to those looking for deep discounts on real estate and willing to do the due diligence and legal work.
  

Final ThoughtWhether you invest in tax liens or tax deeds depends on your strategy, risk tolerance, and how active you want to be. Tax liens are more like buying a bond that might turn into a property. Tax deeds are more like buying a foreclosure at auction — higher reward, but also higher risk.
Let me know if you'd like a list of specific states by category or an explanation of hybrid states, which offer both options.