How Do Tax Liens Work?

How do tax liens work? To answer the question, the first step is to explain a tax lien. Local governments (county, city, township, town, parish) receive most of their operating funds from property taxes. When property taxes go unpaid the local government’s method to enforce payment of those taxes is to place a tax lien on the property. A tax lien is the legal documentation defining a debt the property owner has to pay the government past due property taxes. So the local government has the money it needs to operate it sells those tax liens in the form of tax lien certificates to investors.

Tax lien certificate investors are rewarded for their investment with an interest rate defined in state law that can pay interest rates of 16%, 18% 36%. They are most often purchased at annual government auctions, but can sometimes be purchased from local governments without an auction. What are tax lien certificates and some of the advantages of investing in them? Investing in tax lien certificates is one of the safest, predictable and secure investments you can make. Here are some unique features about tax lien certificate investments that benefit the investor:

  1. Tax lien certificates are sold in about half of the states in the USA; the other half sell tax deeds.
  2. The laws and regulations regarding the sale of tax lien certificates are defined by state law and administered by local government.
  3. State laws set the maximum interest rate a tax lien certificate may pay, which can pay interest rates of 16%, 18%, 25% annually, depending upon the state.
  4. There are no commissions or brokers when buying tax lien certificates or when they are paid off by the delinquent tax payer… no extra fees paid to a middleman, you get back all your investment and all the interest by law.
  5. About 95% of all tax lien certificates are paid off within three years of being issued.
  6. Tax lien certificates are secured by real estate. That means if that tax lien certificate is not paid you can own and by law, take the property for only the cost of the unpaid property taxes and fees.

Bottom line is one of the key advantages of tax lien investing is the security it offers. Tax lien certificates are backed by real estate, meaning that if the property owner fails to pay the outstanding taxes and interest within a specified timeframe, the investor may have the opportunity to acquire the property for only the cost of the unpaid taxes and fees. This unique feature of tax lien investing makes it a low-risk, high-reward investment strategy.

Keep in mind that when considering tax lien investing, it is essential to understand the specific laws and regulations in each state. About half of the states in the USA offer tax lien certificates, while the other half sell tax deeds. Investors should thoroughly research the rules and procedures in their target investment areas to ensure compliance and maximize their chances of success in tax lien investing.

Ted Thomas has helped thousands investors understand the answer to: “How do tax liens work?” and the secrets to avoid costly mistakes and take advantage of opportunities others don’t see. Over the past 25 years Ted Thomas has become known as America’s Tax Lien Certificate and Tax Deed Authority. In the video linked below Ted introduces one of his students, who discusses his first tax lien certificate buying experience:

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