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Tax Insights

Tax Liens and Tax Deeds

Tax Liens in an IRA

In your self-directed account you have an opportunity to invest in tax liens or tax deeds. A tax lien is the purchase of a lien on a property, typically related to unpaid taxes. A tax deed is the purchase of a property from the county as a result of the non-payment of taxes. The process and rules may vary across each county and you may attend an auction to facilitate the investment in one of these assets.

Investors are often attracted to tax liens/tax deeds because of the relatively low capital necessary, the potential returns and the ability to be involved in real estate without much of the responsibility of owning the actual property.

A tax lien is a lien imposed on the property by law to secure payment of taxes. Tax liens may be imposed for delinquent taxes owed on real property or personal property, as well as a result of failure to pay income taxes or other taxes. It is imposed by the county in which the property is located.

An investor will purchase the lien from the county for the possibility of one of two profitable results. First, the tax lien could be redeemed, meaning the owner will pay the lien amount plus interest (a rate that is established by each state) to the investor. If the owner does not pay the lien within a certain time, the investor is given the deed to the property.

Some states don’t offer tax liens, but rather tax deeds. A tax deed sale is the forced sale conducted by a governmental agency of real estate for nonpayment of taxes. In this case, an investor has an opportunity to buy a property deed at discount.