Investing in Property Tax Liens with a Self-Directed IRA 

What is Tax Lien Investing? 

Investing in tax liens is to purchase a legal claim on a property that has delinquent taxes. A tax lien is used to buy the property from the county the property is sold. The tax lien on the property is sold due to the non-payment of taxes, and the purchasing process or rules are dependent on the location. Potential buyers attend auctions within the municipalities to invest in this asset type. 

The reason investors seek out tax liens is typically due to the small amount of money necessary to begin, plus the potential returns on this investment. Tax liens are often viewed as a more straightforward method of investing in real estate without the hassle of buying and owning traditional property. 


Why Tax Liens? 

Self-directed investors purchase a tax lien for the potential two scenarios: 

1. The possibility that the purchased tax lien would be repaid by the owner of the property plus interest on the lien. All repaid taxes and earned interest will be paid to the investor accordingly to a pre-determined agreement.  

2. Upon the chance that the owner fails to pay the lien within a specific time frame, the investor is given the deed to the property. 

Most investments in tax liens result in the owner of the property repaying the liens and all interest. A self-directed IRA might only obtain ownership of a tax lien by only offering up the money necessary to purchase the tax lien certificate and paying all closing fees. If that is the case, then the self-directed IRA can sell the acquired property, and all the funds from the sale of the property go back into the IRA. 


What is a Tax Deed? 

There’s one main difference between a tax lien and a tax deed: the governing body that is auctioning the property. Some states don’t utilize tax liens, and instead, the local government provides a tax deed, or more likely, a hybrid of the two.

The property in question goes to public auction, where the ownership of the property is transferred to the winning bidder. Bidding and winning on a tax deed sale means that the title of the property now belongs to the auction winner.

If the state where the property was purchased has a redemption period, the new property owner or another party with a vested interest (such as a lender), pays the delinquent taxes on the property, plus any penalties or fees incurred over time. This allows all parties to redeem their interest in the property.

If the state of purchase does not have a redemption period, the property would then be conveyed to the new buyer so that the prior owner’s interest is wiped away, including mortgages. Quietly ordering a title certification will be in order by the winning bidder because they will need to remove any other claims to the property.

Investing in a Tax Deed

Most investors acquire property through a tax dees sale with one of three options in mind:

  • Rehabilitation of the property with sale
  • Wholesale, or selling as-is 
  • Renting the property

If there are any tax overages from the sale, they can be collected by the lender. If there is no lender, the property owner has the right to collect those overages from the sale. It’s important to note that investors in redemption states should wait until the expiration of the period before attempting to clear the property’s title, or beginning renovations.

Investors who choose to purchase property through the sale of a tax deed do so at a significant discount. Due to the competitive nature of estate auctions, most properties are purchased at a far higher rate than the unpaid taxes tied to the property.

Tax Lien vs. Tax Deed

According to the NTLA, or the National Tax Lien Association, 36 states and 2,500 jurisdictions within the US allow for the sale of tax liens. Only 31 states allow tax deed sales, but many states utilize a hybrid of the two.

If a hybrid approach is used, the lien certificate goes to tax deed sale after a brief time period. Tax deed only states do not issue a tax lien sale before going to tax deed sale.