A tax lien sale is a government-conducted auction of tax liens imposed on real estate due to unpaid property taxes. Along with tax deed sales, this method is one of two primary ways local authorities collect delinquent property taxes.

In a tax lien sale, the government offers the tax lien, which includes delinquent taxes, accrued interest, and sale-related costs, to prospective investors.

Once held exclusively in person, these auctions have increasingly moved online, especially in larger counties. This shift allows investors from various locations to participate, broadening the pool of potential buyers and increasing competitiveness.

How Does the Tax Lien Sale Process Work?

Once an investor purchases the lien, they must wait for the redemption period—a specified time frame during which the property owner can repay the lien amount, plus interest and fees. Each state has its own laws governing the redemption period, and during this time, the lien holder cannot pressure the property owner to pay or threaten foreclosure.

Any contact with the property owner that violates these rules can result in forfeiture of the lien certificate.

If the owner fails to pay by the end of the redemption period, the lien holder can initiate foreclosure. The lien holder typically pays the costs of foreclosure upfront, though these may be recouped if the property owner redeems the lien before the foreclosure is finalized.

Upon successful foreclosure, the investor may either acquire title to the property, often via a quitclaim deed or participate in a tax deed sale, where they get the right to bid first.

State-Specific Considerations

In states like Illinois, for example, a “Tax Deed” can clear the title of any encumbrances via a court order, ensuring a clean transfer to the new owner. This provides additional security for investors concerned about title issues or prior claims.

State-by-State Tax Lien Investing High Returns Potential

One of the most attractive aspects of tax lien investing is the potential for high returns, which can far exceed traditional investments. Different states offer varying maximum rates of return, such as:

Here’s a complete list of maximum interest rates for tax lien certificates across all U.S. states that offer tax lien investing:

  • Alabama: 12% annually
  • Arizona: 16% annually
  • Colorado: 9% annually
  • Florida: 18% annually (guaranteed 5% return)
  • Georgia: 20% annually
  • Illinois: 36% annually (18% every six months)
  • Indiana: 10% for first six months, additional 10% for next six months
  • Iowa: 24% annually (2% per month)
  • Kentucky: 12% annually
  • Louisiana: 12% annually
  • Maryland: 20% annually (varies by county)
  • Massachusetts: 16% annually
  • Mississippi: 18% annually
  • Missouri: 10% annually
  • Montana: 10% annually
  • Nebraska: 14% annually
  • Nevada: 12% annually
  • New Jersey: 18% annually
  • New York: 16% annually (varies by county)
  • North Dakota: 9% annually
  • Ohio: 18% annually
  • Oklahoma: 8% annually
  • Oregon: 16% annually
  • Rhode Island: 16% annually
  • South Carolina: 12% annually
  • South Dakota: 12% annually
  • Tennessee: 10% annually
  • Texas: 25% within six months (50% annual return)
  • Utah: 12% annually
  • Vermont: 12% annually
  • West Virginia: 12% annually
  • Wisconsin: 12% annually
  • Wyoming: 15% annually

Each state has unique regulations regarding tax lien investing, so be sure to verify the specific terms and conditions in the state where you’re investing.

Due Diligence is Key

As a client of Horizon Trust or any self-directed custodian, the investor is solely responsible for vetting each investment. Horizon Trust cannot offer protection against poor or improper investments.

Thorough due diligence on the property, the governing state rules, and the entities involved in the investment are critical. Furthermore, ensure that the investment aligns with IRS regulations regarding Individual Retirement Accounts (IRAs) to avoid tax penalties or account disqualification.

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