What Exactly Are Surplus Funds?
Imagine you owe property taxes, and unfortunately, you fall behind. The local government, in order to collect the unpaid taxes, eventually puts your property up for auction in a tax sale. Now, let’s say your property sells for much more than you owed in back taxes, penalties, and auction costs. The extra money leftover after everything is paid off is considered surplus funds. Basically, it’s the overage from the tax sale. It is held by the government, waiting for the original owner or other parties with a claim, to come forward and file for it.
Background: Why Do Tax Sales Happen?
Before diving deeper into surplus funds, let’s quickly discuss tax sales. When property owners don’t pay their property taxes, the government has the right to recover the money owed through a tax sale. Tax sales are public auctions, where properties with unpaid taxes are sold to the highest bidder. The government uses the money from the sale to pay off the outstanding tax debt, along with any penalties and the administrative costs of the auction.
How Do Surplus Funds Arise?
Surplus funds occur when the property is sold for a price greater than the total amount owed. This can happen for several reasons:
- Property Value Increase: The real estate market may have seen an increase in property value between the time that the taxes became delinquent and the tax sale. This results in a higher sale price.
- Competitive Bidding: Sometimes, there are a lot of bidders at the tax sale, and they are all interested in the same property, resulting in the price being bid up beyond what’s needed to cover the debt and sale costs.
- Simple Market Dynamics: Just like any auction, the sale price can be affected by general market trends, demand for a specific area, and even the unique appeal of the property.
Who is Entitled to Claim Surplus Funds?
The most common claimant is the former property owner who lost their property due to unpaid taxes. However, other parties may also have a claim to surplus funds depending on state and local laws. Here’s who might have a right to claim them:
- The Original Property Owner: The most common recipient of surplus funds is the previous owner who had their property sold in the tax sale.
- Lienholders: Mortgage companies, banks, or other creditors who had a lien on the property may be able to file a claim.
- Heirs: If the previous owner is deceased, the heirs of the property might have a claim to the funds.
- Assignees: In some situations, a party might be assigned the right to claim the surplus funds by the original owner.
It is important to understand that not every person that has a claim is guaranteed to get a portion of the money, and some of the claims can be contested.
How to Claim Surplus Funds
Claiming surplus funds can be complex, and the rules can vary considerably depending on the location. Here’s a general overview of the process:
- Find out if Surplus Funds Exist: Many counties and municipalities will publicly post lists of properties that were sold in tax sales that had surplus funds. You can also contact the relevant local government office, such as the county treasurer or tax collector.
- Gather Documentation: To file a claim, you usually need to provide documentation showing that you are the rightful claimant. This could include proof of ownership (deed), identification documents, and possibly legal documents such as a will or court order if you’re claiming as an heir.
- Submit a Claim: Claims are generally filed with the same government entity that held the tax sale. Follow all their instructions and use the proper forms.
- Legal Process: Some states and counties require a court process to resolve disputes over surplus funds or to officially approve claims. You may be required to attend hearings.
- Claim Deadlines: It’s important to act quickly. There is usually a deadline for filing a claim, which can be as little as several months. If you do not file before the deadline, the funds may be forfeited.
Related Concepts: Tax Liens and Tax Deeds
It’s important to understand surplus funds in relation to other aspects of tax sales:
- Tax Lien: A tax lien is the government’s legal claim against your property when you owe unpaid taxes. This lien is what allows them to eventually sell the property to recover the debt.
- Tax Deed: A tax deed is a document that shows ownership of property after it’s sold at a tax sale. The tax sale transfers the right of ownership of the property to the winning bidder through the tax deed.
Tips for Avoiding Tax Sales and Surplus Funds
The best way to avoid needing to claim surplus funds is to prevent tax sales from occurring in the first place:
- Pay Your Taxes on Time: This is the simplest way to prevent tax sales.
- Set Up Payment Plans: If you are struggling to make payments, contact the tax office as soon as possible to set up a payment plan or to seek help.
- Communicate With the Taxing Authority: If you are going through a hardship, there may be programs to assist you. Communicate to the office to see what options might be available to you.
- Monitor Notices: Pay close attention to any tax notices or legal documents regarding your property. Ignoring them won’t make them go away.
Common Mistakes & Misconceptions
- Assuming You’ll be Contacted: While governments may attempt to notify prior owners of surplus funds, it’s ultimately your responsibility to stay informed and file claims.
- Believing all Surplus Funds are “Found Money”: Just because there is surplus money doesn’t mean it will be an easy process to claim, it may involve legal action, and the claimant must prove that they have the right to the funds.
- Delaying Action: Missing deadlines can mean losing your right to claim the funds, so act quickly once you discover surplus funds may exist.
- Thinking all Tax Sales Generate Surplus Funds: Not every tax sale results in surplus funds, often the property is sold at auction for close to the amount due or lower.
Conclusion
Understanding surplus funds is essential for anyone who has had a property sold at a tax sale. While these funds can represent a financial recovery, they require navigating a process that varies significantly by jurisdiction. Staying informed about your property taxes and acting promptly can help you avoid tax sales and the potential need to claim surplus funds. If you believe you may be entitled to claim, consulting with a tax professional or attorney familiar with local tax laws is highly recommended.