Tax Lien Certificate - Explained
What is a Tax Lien Certificate?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Table of ContentsWhat is a Tax Lien Certificate?How is a Tax Lien Certificate Used?How Tax Lien Certificate WorksWhat to Consider when Investing in Tax Lien CertificatesBenefits of Investing in Tax Lien CertificatesRisks Associated with Tax Lien CertificateAcademic Research for Tax Lien Certificate
What is a Tax Lien Certificate?
Tax lien certificate refers to a document that investors acquire through auctioning of property whose owner has failed to pay taxes. The state law may impose a tax lien on the property as collateral to ensure that payment of taxes owed to the government is paid. In other words, liens are levied for tax on property which has not been paid to the government. It can also be levied on personal property tax failure or where there is non-payment of income taxes.
Back to:ACCOUNTING & TAXATION
How is a Tax Lien Certificate Used?
Basically, unless the due taxes are settled, a property with a tax lien cannot be refinanced or sold. However, an investor can buy a tax lien certificate. The county tax collectors usually organize for a public auction either in person or online where the tax lien certificates are put on auction. In this type of auction, the bidding is done on the interest rate and not on the value on the property's amount. The investor with the lowest bid is the one who is given the tax lien certificate.
How Tax Lien Certificate Works
The local government files a tax lien against the owner of the property who has defaulted to pay property taxes. The Government taxing agencies issues a public certificate which states the total sum of the pending tax payments. The government is able to recover its unpaid due taxes by selling the tax lien certificate to the private investor, instead of getting it through the property owner. Note that the property owner is usually given a given period of time to repay the debt. However, the repayment period differs from one state to the other but the range for most states is between 1-3 years. In case the owner of the property manages to settle all the pending taxes including interest, the investor who purchased the certificate is the one who receives these payments. This means that the investor will pay the tax due to the government on behalf of the property owner in exchange of tax lien certificate. The property owner is then given time to repay back that amount to the investor but this time with interest the amount has generated. The interest to be paid also differs per state, however, the annual interests may range from 16%-50%. If the property owner manages to pay back all the amount and interest, then he or she gains the ownership of the property. Nonetheless, if the property owner is not able to repay the amount within the stated time as per the jurisdiction, then the investor has a right to initiate a petition in court to officially possess the property. The investor has a right to either evict the property owner and obtain its ownership or sell the property through public auction.
What to Consider when Investing in Tax Lien Certificates
Although investing in tax lien is safe, like any other investment, it is important to do a bit of research before taking this option of investment. You need to be sure about the value of the property you are investing in. The following are some of the considerations if you are planning to venture into tax lien investment:
- First, you need to consider the location of the property being placed under lien. If you are looking for a property that will give you better returns, then you need to consider an area whose value is high.
- Secondly, find out about the environment in which the property is situated. Avoid property situated in on the hazardous ground as well as hazardous materials.
- Lastly, different states offer the best returns when you buy tax liens certificate. You, therefore, need to do research and find out which states have the best offer that will give you most profits once you invest in the liens.
Benefits of Investing in Tax Lien Certificates
There are several benefits when you invest in tax lien certificates. Some of the benefits are listed below:
- Investors are able to buy the tax lien certificates at a much low price. In other words, the threshold for purchasing is low.
- Since purchasing a tax lien certificate requires a small amount of money, it is possible for investors to purchase multiple tax lien certificates hence spreading their capital. This means that investors are able to diversify by purchasing lien certificates in different locations.
- It is easy to know where the auction is taking place including all the information you need to know about the property being auctioned. You simply need to call the tax personnel assessing the property in the county.
- Investing in lien creates a consistent returns rate for an investor. This means that it creates a source of income for the investor. If an investor buys a tax lien certificate with a higher interest rate, then he or she will get considerable returns.
Risks Associated with Tax Lien Certificate
Despite the benefits that the tax lien certificate brings to an investor, it does have some risks. Some of the risks include:
- The property owner may not be motivated to repay back the amount especially if the market value of buying the tax lien certificate is less than the amount of taxes due.
- The property owner may risk losing the property to the investor in the event that he or she does not manage to redeem the property (to repay the amount he owes to the investor).
- There is addition repair cost attached to the property once you take over its ownership.
- Since the tax lien certificate has a time limit, once it expires, an investor may not be able to collect any payments. Also, another investor can claim the ownership of the property once it expires, not unless you purchase subsequent liens to enable you to maintain your rights over the property.
- Purchasing of tax lien certificate requires that the investor make payments within a short period of time which might cause pressure to the investor.
- Since the tax lien certificates are illiquid because they do not have a secondary trading market.
Academic Research for Tax Lien Certificate