A tax lien is a lien that is enforced by law upon a property in order to secure that taxes on the property will be paid. Delinquent taxes owed on real or personal property, as well as failure to pay income or other taxes, are products of the imposition of a tax lien. A federal tax lien can only be issued in situations regarding federal taxes (including gift, income, and estate taxes). Taxes for each person vary from county to county (likewise state to state) but in any case, one must
pay their taxes by the due date when their bill is issued.
Tax Lien Certificates Scam
Many people believe that anything related to Tax liens must be a scam, this myth is simply not true – Tax liens Certificates are an investment which
generally have got a pretty high success rate and ROI (return on investment). When investing in tax liens it’d be best to seek professional advice, like all other sorts of investments if you’re not smart about it you are not going to make any money and you are probably going to lose everything. Of course there will be those selling fakes, so watch out for those. Keep reading for some info on purchasing tax liens.
Tax lien certificates scam - Do not buy the certificate of a home that you have not seen as the certificate might be worth more then the actual house. Keep in mind that large companies are willing to buy tax liens at a 0-3 percent interest rate (as its a numbers game and eventually one them will be a foreclosure).
Even if one files for extension, the taxes will have to be paid eventually and for those who fail to do so after constant reminders from the government, a judge in court will issue a tax lien to be attached to the property. If a house has a tax lien on it, it cannot be sold until the tax lien is paid off. Unfortunately from the house owner, not only does the entire tax lien have to be paid off but there is more often than not a proportionately large interest rate applied in order to prevent people from not paying their taxes on time without consequence, which also vary from state to state. Various differentiating state interest policies are as follows:
- Alabama – 12%, with a redemption period of three years
- Arkansas – 16% with a redemption period of three years
- Connecticut – 18% with a redemption period of two years
- Iowa – 24% with a redemption period of one and ¾ years
- Kansas – 5% with a redemption period of three years
- Massachusetts – 16% with a redemption period of up to six months
- Minnesota – 12% with a redemption period of one year
- Nebraska – 14% with a redemption period of three years
- Ohio – 18% with a redemption period of one year*
- Oklahoma – 8% with a redemption period of two years
- Vermont – 12% with a redemption period of one year
- Wyoming – 18% with a redemption period of four years
In the event that a tax lien has not been recorded yet and is in pending process and the property is sold, the new owner of the property would be considered responsible for paying off all of the taxes that are owed.
*only applies for counties with 200,000+ residents
{ 15 comments… read them below or add one }
This article is informative… now I know that they aren’t scams. Great news!
Hey I found a bunch more info on tax lien certificates, with even some history. I had no idea how far back those things went. Check it out – http://www.irs.gov/businesses/small/article/0,,id=108339,00.html
This article was an eye opener, I never knew that you could purchase a tax lien let alone make money on it. So if I am understanding this correctly you don’t have to be a business to purchase a tax lien you just have to have the money it takes to pay the taxes off and then the lien belongs to you and the home owner has to pay you the taxes, correct? Why is this even possible? Why would the government want to do this?
I understand the taxes on your property need to be paid, I get that, “give to Cesar what is Cesar’s but when did it become ok for the rich people to make a profit off of the misfortune of the middle or lower income people. Back in the good old days you could pay off your taxes in trade if you didn’t have the money, but now all anyone wants is money or material positions and getting out of you just what you owe is out of the questions they have to tack on penalties and interest and late fees until they cause you to go bankrupt. This post has some great information that most people I’m sure didn’t know about, thanks for enlightening us.
Tax lien certificates are a great investment! When tax liens are bought, the counties get the monies they need to operate. Our property taxes are used for many purposes in the counties: road construction and maintainance, Schools are built and funded, teachers salaries are paid, even county flood control programs… The homeowner owes the taxes and penalties even if the lien certificate is never sold, except then the counties can’t provide the services they are expected to provide! Why not help the counties out AND make an excellent return on your money?
How do you go about getting in on this investment? Do you just get a hold of mortgage companies to see what properties have a lien on them, or is there a list or something that is published by banks etc? I have never heard of this until now so I was unsure. Please advice, and thank you for the information.
Who would you suggest contacting in order to get professional advice on how to purchase Tax Lien’s the smart way? Would you simply contact an accountant or is it someone more specialized in the field? How do you get the opportunity to go see a property that you are interested in buying the tax lien on, how do you know which properties they are is there some kind of list? If you purchase a lien and they do not pay the taxes on it and they start charging interest do you also accrue the interest or does the interest go to the banks? I also wanted to thank one of your reader that left a comment. John, thanks for the link for additional information it was very helpful as well.
Who would you suggest contacting in order to get professional advice on how to purchase Tax Lien’s the smart way? Would you simply contact an accountant or is it someone more specialized in the field? How do you get the opportunity to go see a property that you are interested in buying the tax lien on, how do you know which properties they are is there some kind of list? If you purchase a lien and they do not pay the taxes on it and they start charging interest do you also accrue the interest or does the interest go to the banks? I also wanted to thank one of your reader that left a comment. John, thanks for the link for additional information it was very helpful as well.
I still need further clarification of how tax liens work. Even after reading this article, I am still unclear about how you can make money playing the numbers game when purchasing tax liens. How many liens or what must their value be in order to make a profit? What would be the minimum investment? What is the probability of default on the part of the home owner and is that what you hope to happen when you invest in a tax lien? The other thing which can use further elucidation is how to avoid the tax lien scams. If I am totally new to this and barely understand how they work, I am liable to fall for any scam out there on the internet. I hope I can find a more in depth article about this. Perhaps the authors of this article will consider writing a sequel or follow up to this article.
If you believe in murphy’s law or are somewhat pessimistic by nature, then tax liens are a good bet. After all, as the recession and the abysmal job market continues, you can expect home owners to continue to struggle to make a living and they will have to keep putting off paying their property taxes. It should be years before the economy reaches a boon, so it stands to reason that investors have many years of dividends.
Why not tax liens? It must be a more secure investment than the roller coaster stock market. What I do not quite understand about tax liens, is how you make the return on your investment. Does it pay off when the home owner pays off their property taxes or do you make money on the amount of interest from late fees? Is there a period when the home owner a foreclosure on the home because of failure to pay property taxes, and if so, does that benefit the investor of the a tax lien?
I agree with John there needs to be a follow up article to this one that answers the questions listed in the comments. What does happen when a home owner goes into foreclosure and you hold the tax lien? Does the new home owner that purchases the property have to pay the back taxes? Who gets the interest accrued? I agree with Helen as well that this has to be more stable than the stock market, I have been reading about people borrowing money against their stocks, but what happens if the stock market crashes and those same stocks aren’t worth anything anymore. It doesn’t sound like a tax lien ever loses it’s value but continues to collect interest. Can you borrow money against a tax lien?
Tax liens are a great investments…I just started..you can contact your county assessors or Recorders office to get some great information. I prefer buying over-the-counter vs. bidding at the auctions….
Where is the bank (mortgage holder) in this scenario. If you pay the back taxes on this property, and you are holding it for more than a year, who will pay the taxes for the next year.
Because a person does not pay their property taxes, does not necessarily mean they will be moving out of their home or that the mortgage bank will foreclose….or does it. If the taxes are not paid the following year what happens to your lien certificate. A lien can sit on a house for years before anything happens.
The property taxes has priority over any other lien (ie, mortgage, mechanics, ect.). If the property owner fails to pay the back taxes and penalties before the redemption period expires, the purchaser of the tax lien certificate can foreclose on the respective property and obtain it free and clear. Now, if the property is backed by a bank mortage, 10 times out of 10 the bank with step up and pay the back taxes and the penalty in order to protect its mortgage. Remember that the counties are left with no other choice on how to generate the revenue needed for fire and police departments, public recreation centers and so on. The property taxes not paid has an adverse affect on the county.
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