Tax Lien Certificates For Investment

What are Tax Lien Certificates?
There are two kinds of tax liens: property tax and federal income tax liens. A property tax lien is a certificate sold by the government to people outside of the owners of a home. When those owners default on paying their taxes, you are taking care of the local costs of maintaining the city, paying for the services provided for by the city. Once you have paid the outstanding balance owed to the city, including all interest charged, and the taxes have not been paid by the current owner of the home, you are entitled to the deed on the property. Essentially, you are making a small investment that could earn you a home at a fraction of the price!

The Risks Involved
There is, however, a great deal of risks involved when investing in tax lien certificates. When buying, you have to make sure that you are the first lien on the property. You have to make sure that a creditor, like a bank or mortgage company, does not have rights to the property first. If the property owner declares bankruptcy, the federal government may repossess the property. You have to figure out if you’re the first in line for the property when purchasing a tax lien.

You also need to know what value the property itself holds. You are highly encouraged to check out the property to see if the investment is worth it. Is the house in good shape? Is it in a good area? If you were buying it at market, would it be worth it? These are all good questions to ask yourself when looking at buying tax lien certificates.

Buying Tax Liens at Auction
Tax lien certificates are acquired at auctions. If you are legally able to buy real estate, you can participate. Make sure you’re registered to go to the auction if that is required. Chances are you’ll also need to fill out required tax forms on the day of the auction so that the government is aware of your purchase if you make one that day. As far as being financially ready, you’ll need to pay the amounts due on the property immediately at the auction – so make sure you’re financially prepared to do so!

If you have purchased a lien, you don’t actually get to take it home and keep it in your personal files. It is kept at the local tax office or treasury office. You will receive something in writing for your files from whatever town you are buying in through.

Federal Tax Liens
A federal tax lien certificate is related to federal taxes. They work similarly to property tax liens but it’s on a federal level. If a tax payer defaults on their federal taxes including all interest and penalties, the US government has a right to the house. If you’ve paid for the lien through the federal government, you can be entitled to ownership.

Tax lien certificates can be tricky to understand, but the benefits can be enormous. See what’s currently available in your town or your state if you’re interested in taking a closer look.