While property tax liens can be a lucrative investment, they aren’t something an investor can jump into without knowing about the process. Since the process can vary by state, some investors opt to stick close to home when investing in property tax liens. The investor earns high interest, and in some cases, can gain ownership of the property for little more than the cost of purchasing the lien.
Three common methods used by states to raise revenue include sales tax, state income tax and property tax. Most, though not all, states use property tax. If the property owner fails to pay his property tax, states use several methods to collect back taxes. One is the tax lien. When you invest in a tax lien, you can end up owning the property. Yet, this is not always the case.
Some states use the tax lien as a way to collect unpaid property tax and others use the tax deed sale. Some states use both. In a tax lien, an investor pays the delinquent taxpayer’s property tax. When the property owner eventually pays her taxes, she repays the investor with interest. If she fails to pay the investor within a specific timeframe, the investor has the option to foreclose on the property, in effect result in evicting the delinquent taxpayer. In a deed sale situation the government sells the property for the delinquent taxes, instead of the investor buying the tax lien.
While it is possible to pay the tax lien on real estate and eventually foreclose and evict the property owner, that is not necessarily the goal for investors. A tax lien sale enables an investor to earn high interest on a relatively secure investment. In most cases, the property owner eventually repays the delinquent taxes, interest and penalties, resulting in the release of the tax lien.
Laws and procedures vary by state involving property tax liens. A taxpayer has a specific timeframe in which to repay the investor, which varies according to state. For example, it might be three years in one state and six years in another. The amount of interest charged also varies. For example, an investor might earn 10 percent in one state, and 18 percent in another. The process and procedure involved in foreclosing and evicting the delinquent taxpayer also varies by state.
Property tax liens take priority over most other lien types. Therefore, if an investor purchases a tax lien on property with a mortgage lien against it, and the investor forecloses for the unpaid tax lien, the mortgage lien goes away. The investor is not obligated to pay off the mortgage, and the mortgage lien does not stay attached to the property. It is also possible that a previous investor purchased a tax lien for the same property, for a previous year, and will have the option to foreclose before the second investor. This does not mean the second investor loses his initial investment or interest, just that the first investor can foreclose before the second has the opportunity.
- "Modern Real Estate Practice"; Fillmore Galaty, et al.; 2006
- “Investing Without Losing”; Don Sausa; 2006
- Lake County Ohio Treasury. "Tax Lien Certificate Sales," Page 4. Accessed Oct. 21, 2020.
- National Tax Lien Association. "Common Questions About Tax Liens." Accessed Oct. 21, 2020.
- Office of the County Clerk, Lake County Illinois. "Tax Redemption Process." Accessed Oct. 21, 2020.
- Kite Capital Partners. "Portfolio." Accessed Oct. 21, 2020.
Ann Johnson has been a freelance writer since 1995. She previously served as the editor of a community magazine in Southern California and was also an active real-estate agent, specializing in commercial and residential properties. She has a Bachelor of Arts in communications from California State University, Fullerton.