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Tax Lien Certificates

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Last Updated: Tuesday, 19 January 2021

Participating in a tax lien auction is a non-traditional way to invest in real estate. Auctions are held throughout the United States, and applicants have the opportunity to purchase properties at significant discounts.

Tax liens can be imposed by law on a property to ensure the payment of taxes owed collection authorities. Liens can be levied for non-payment of taxes owed on real estate, personal property, or the failure to pay income taxes.

Property Taxes and Tax Liens

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County or municipal governments collect property taxes to pay for the essential services provided to their communities. When those taxes aren’t paid, these government agencies aren’t receiving the funding needed to pay for their expenses. The taxes are delinquent, but these government agencies need the money to pay for expenses they’re incurring now.

By issuing a certificate, the agency owed the tax revenue is paid by individuals purchasing the tax liens. The government is satisfied because they can pay for the services they’re providing. The investor is happy too, because they’re in possession of a certificate that entitles them to guarantees they value.

Benefits of Liens

When a tax lien certificate is purchased, it entitles the holder to certain guarantees:

  • A rate of interest on the outstanding balance on the lien. That is, the delinquent taxpayer not only has to pay the taxes due, but also an interest rate penalty. This is the money owed the holder of the certificate.
  • Alternatively, if the taxpayer fails to pay the outstanding taxes within a pre-determined time frame, the holder of the tax certificate is entitled to the deed on the property.

This is why investors are interested in tax lien certificates. They have the opportunity to earn a high rate of interest on their investment, or they could wind up buying a home at a fraction of its market value. Interest rates on certificates can be as high as 20 to 50%.

Risks Associated with Liens

Investors need to do their research prior to bidding on any distressed property. It’s a good idea to track foreclosures in the region to see what types of properties are typically available in an auction. As is the case with high-yield securities, tax liens are associated with three significant risks:

  • First Liens and Subordinate Liens: In many counties, or jurisdictions, tax liens are allowed to be first liens against a property; they are not subordinate to other forms of liens. Holders of a first lien will own a property if the taxpayer cannot make payment on their back-taxes.
  • Foreclosure: If the homeowner declares bankruptcy, the Internal Revenue Service, or other creditors, may have a claim to the property that needs to be satisfied first.
  • Property Values: A person that cannot afford to pay property taxes may not be maintaining the home properly. If the home has been neglected long enough, the tax lien holder might be faced with costly repairs before the home can be sold.

Tax Lien Auctions

Liens and certificates are sold through an auction process. Anyone that can legally buy real estate or property in the United States qualifies to participate in these auctions.

Before bidding in the auction, registration is typically required. Observers or visitors are usually not allowed a seat at a sale. The IRS requires all tax lien issuers to send 1099-INT Forms to buyers. This means participants will have to fill out a W-9 Form at the time of registration.

The exact bidding process will vary by jurisdiction, but the auction may separate properties that expect to receive premium bids (bids in excess of the taxes due) from other properties. Acceptable means of payment can include personal, certified, or bank checks. Exact amounts are usually due immediately following purchase.

Finally, tax lien certificates are normally held in safekeeping at the county’s tax or treasurer’s office. However, a certificate can be mailed to a home by sending a written request to the government office.

Federal Tax Liens

In the U.S., a federal tax lien may be imposed when the homeowner does not pay federal income tax, gift, or estate taxes. Federal tax liens work the same way as county liens. If an individual does not pay their taxes, interest, or penalties, then the U.S. government has a right to that individual’s property.

Once the federal government has requested to be paid the taxes owed, the lien / assessment is made against the homeowner. It will continue to be in place until the debt is paid. This federal tax lien is valid without notifying the taxpayer the lien exists.

In addition, once a Notice of Federal Tax Lien (NFTL) is filed, this lien will have priority over all other liens on the property. There are exceptions to this rule when certain securities and motor vehicles are involved. If a state legislature elects, it can also enjoy a higher priority than the federal lien.

Online Tax Lien Information

The following states allow investors to conduct state-wide searches of county or federal tax liens in their jurisdiction:

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