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? 

Depending on the state, some states don’t offer tax liens, but instead, the local government offers a tax deed. A tax deed is a forced sale upon non-payment of taxes by the homeowner. Investors then have the chance to buy the property’s deed in question at a steep discount.