Self-Directed Tax Lien Investments

Tax Liens and Tax Deeds in an IRA

You have the ability to invest in tax liens or tax deeds in your IRA or other retirement account. Learn more about this investment type and how it works.

Tax lien vs. tax deed

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 property 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.

What’s attractive about tax lien investments?

An investor will purchase the lien from the county for the possibility of one of two profitable results:

• The 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 lien investments, 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.

Investing in tax liens with an IRA

Like many other assets, it’s possible to invest in tax liens using your IRA, 401(k), or other retirement account. You have the freedom to invest in nearly anything in your account, provided it’s a self-directed account.

Rules for self-directed tax lien investing

No matter what type of asset you’re investing in, there are important rules to remember when investing using your retirement account:

• You cannot commingle personal and account funds, meaning that you need to use funds from your account or money from an individual who is not disqualified to pay the county when your bid at the auction is accepted
• You are unable to purchase an investment from a disqualified individual
• Any property purchased at an auction cannot be rented, lived in, or have work completed by disqualified individuals
• Any income earned from the auction asset must return to your account
• All expenses related to maintenance, upkeep, or improvements to the auction asset must be paid from your account

For the complete list of rules, visit the IRS website.

Tax lien investing in action

To learn more about tax lien investing in an IRA and how it works, read this case study, Tax Lien Sale Nets $92,000 in Profits.