What Is a Tax Lien and How Does It Work?

If you’re new to tax lien investing, you might be asking yourself; exactly what is a tax lien and how does this all work?

Investing in tax liens is rewarding if done correctly. This is a low-risk investment, however, unlike other safe investments, like bank CDs which pay low interest rates, tax liens are high yielding.

Keep reading, and you’ll see the enormous profit potential.

You may watch the video above, or if you prefer, read the transcript below.

Tax Liens Explained

What is a tax lien? The term tax lien refers to a legal obligation to secure the payment of taxes owed on a property.

A tax lien may be imposed for tax arrears owed on real estate or personal property and for failing to pay income taxes or other taxes.

What Happens To A Property Owner That Can Not Pay Their Property Taxes?

An investor, like yourself, can purchase a tax lien on a home if the homeowner fails to pay property taxes. The investor can use the lien to seek the tax debt, penalties, and interest payment. This is how you can make money on tax lien investing.

When a tax lien certificate is issued on tax delinquent real estate, the property owner is provided with a grace period, called a redemption period, to redeem the lien. The property owner is not evicted. However, the owner can’t mortgage or sell the property until the tax lien is redeemed.

What Is a Tax Lien Redemption Period?

The length of the redemption period varies depending on the state. For example, in Arizona, the property owner is given 3 years to redeem the tax lien, while in Texas the owner is allotted a 6 month redemption period.

Once the redemption period expires, if the property owner has not redeemed the tax lien by paying the delinquent property taxes in full plus a penalty, then the investor who holds the lien may foreclose on the property. However, 97% to 98% of property owners will redeem the tax lien.

If the tax lien is redeemed, then the investor receives back all of the capital that was invested in the tax lien plus an annualized rate of interest, which may be as high as 36%.

Why Tax Lien Investing Works

Whether you purchase the tax lien certificate or win it in an auction, it gives you ownership of the tax lien. This does not mean that you own the property, but it does give you the right to take ownership of the property through foreclosure or be paid back once the homeowner pays their tax bill.

Investors do not transact directly with property owners. Tax lien certificates are sold by local governments. As a tax lien investor, you purchase from the government, and when the lien is redeemed, you are paid by the government.

Learn More About Ted Thomas And Tax Liens

In conclusion, a tax lien certificate is a high-yielding passive investment that is government-backed and guaranteed, and it’s secured by real estate. The tax lien investor will either receive a high rate of return on the investment or obtain ownership of the property.

In the event that the investor acquires the property, the margin between the purchase price and the property’s value can be quite high since the investor obtained the property by merely paying delinquent property taxes.

Please browse our website for more information about this fantastic investment opportunity and take advantage of our library of educational videos to start investing today!

what is a tax lien and how does it work

Read the Video Transcript:
What Is a Tax Lien

Randy: You may be wondering what the heck is a tax lien and certainly you may have heard the stuff about investing in them which I’m not the guy who’s going to answer that. Thankfully we have Ted Thomas here who’s got a lot of experience in this field, has been doing this a long time. Ted, good to see you again. And can you tell us-

Ted: Thank you.

Randy: First, what is a tax lien? What is it exactly?

Ted: Okay. Well, first of all, I’m not an attorney. I’m not a CPA. I’m just an average person. And I learned about this business 30 years ago and I’ve been practicing it all that time. And a tax lien is something that’s very simple. I’m just talking about property taxes. I’m not talking about income tax or state tax or anything like that.

Ted (cont’d): So every property has a tax, it’s called a property tax. And if the property owner doesn’t pay that tax, the local government will issue a lien. In other words, they’re just going to say, “Look, you didn’t pay your tax. So you owe us money. So we’re going to use your house as security and we’re going to put a lien against it.”

Ted (cont’d): So they just take a piece of paper like I’m holding in my hand right now. This is just a tax lien. And they attach that to your house. So you couldn’t sell the property. You couldn’t mortgage it. You couldn’t do anything with the property until you paid that.

Randy: Okay.

Ted: And everybody has to do that every year.

Randy: Okay. I got this.

Ted: Every year you have to pay them. Yeah.

Randy: So it’s still my house, but I can’t do anything with it. You know, sell it or do anything until I make good with the government.

Ted: They don’t kick you out or anything like that.

Randy: Okay.

Ted: You just keep the house but they’re slapping your hand. They’re saying, “Look, you’ve got tax. You have to pay us someday.”

Randy: Sure.

Ted: Yeah.

Randy: And that certificate you held up, they issue that then?

Ted: They issue this piece of paper and then they let people know because they published it on the county website and they put it over in the newspaper so people can know that because some people are investors and investors say, “Well, wait a minute, that guy didn’t pay the tax. I think I’ll pay it for him.”

Ted (cont’d): And so an investor could come in which the government wants and pay the tax. And remember the government always needs money especially a local government. Because they pay the school teachers, pay the fire department, police department.

Randy: Yeah.

Ted: They pay the county employees. So someone could come in and buy that certificate. Then instead of the government holding that piece of paper, the individual could have that.

Randy: Okay.

Ted: So people buy hundreds of these. They’ll be in some states like I live in Florida, they’ll issue a million of these certificates every year. So anybody can buy it. So this is not something new, it’s commonplace. And every state either has tax liens or they have tax deeds, one or the other.

Randy: Are they the same thing? Tax deed and tax lien, just different names.

Ted: No, no tax liens, half of the states sell tax liens. If you hear the word tax lien, it really means that’s a benevolent state. Now, when I say it’s benevolent, they don’t kick the people out. The people just stay in their house, but they owe, they still owe the taxes.

Ted (cont’d): Now, you know if you don’t make your car payment they don’t pick your car up the next day, they say, “Hey, wait a minute. Are you going to make your car payment?” So you still have your car. In this case, you still have your house. They don’t push anybody out. But they’ll only let you go so many years.

Ted (cont’d): Texas only gives you six months to pay it. But places like Florida, two years, places like Arizona, three years, some people don’t pay the pay tax for three years. And then if they don’t pay it, ultimately, they’ll lose the property. But basically 97% – 98% of the people pay their tax.

Ted (cont’d): So when you buy a certificate, oh my goodness, you’ve got a safe, secure investment. You’re not investing with Ted Thomas. You are investing directly with the local government. And then when the people come in to pay, the people come in and pay the whole tax. So you get back all your money plus a high interest rate.

Ted (cont’d): Well, banks have an interest rate a half to 1%. What if you can make 18%, double your money every five years? What do you want? 1%? Or do you want to double your money every five years? You make up your mind.

Randy: Well, I’ve got to take-

Ted: So its been going on for 200 years. I didn’t invent it.

Randy: This sounds pretty interesting. And now that we understand what tax lien are and how they relate to a way that people can invest. Somebody wants to learn more, what’s the best way? What’s the next step for them?

Ted: The best way is go to tedthomas.com and select one of the different things that you want learn there and learn about tax liens. You can learn basics. So sometimes I’ll spend six or eight minutes just explaining tax liens. Yeah, eight or 10 minutes just explaining tax deeds and all the different ramifications. We’ve been doing this for, we’ve been teaching people for over 25 years.

Randy: Well, I think that’s why they call Ted. They call you the tax lien certificate and tax auction authority. So you heard it from the authority himself. Go check out the website tedthomas.com and we’ll see you again soon.

Want to learn how to make money in real estate from tax lien investing? Would you like to buy mortgage-free homes for pennies on the dollar? Or earn double-digit interest rates secured by real estate? Then you don’t want to miss this FREE Auction List offer.


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