Investing in tax liens can expose your portfolio to real estate without owning the property. But experts say the process is complicated and warn that novice investors can quickly burn out. Here's everything you need to know about investing in tax certificates, including how it works and the risks.

What is a tax lien?

A tax lien is a legal claim by a local or municipal government on an individual property when the owner fails to pay property tax obligations. Notice is usually given before more drastic measures, such as tax collection, where the Internal Revenue Service (IRS) or local or municipal government can seize an individual's property to collect a debt.

How does a tax Lien investment work?

Tax Lien Investment is a real estate investment in which individuals purchase Tax Lied Certificates. This certificate is created when the local government places a mortgage on the people's property due to unpaid taxes. If the homeowner still doesn't pay the tax bill (with interest), the government has the right to foreclose on the house.

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Local municipality issues tax deposit certificate.

Local governments collect property taxes to fund government programs and services. Local governments collect and issue tax liens when homeowners fail to pay their property tax bills. This certificate contains information such as the amount of tax owed and interest or penalties. If the homeowner still doesn't pay the tax bill (with interest), the government has the right to foreclose on the house.

Tax deposit certificates will be auctioned.

In 28 states, the government can sell tax lien certificates to individual investors, allowing them to recoup losses more quickly. These sales usually occur at tax deposit auctions where a certificate is awarded to the highest bidder.

Investor bids on tax deposit certificate.

Depending on the auction, bids can be based on the amount of cash someone is willing to pay for the certificate or the interest rate they are willing to accept. For cash offers, certificates go to electronic sales of receipt of tax deposits. This is a fast-growing business with an estimated $21 billion in property tax arrears annually; how to invest in a tax lien? Investing in tax liens differs from traditional stock market or bond investing, so it's important to understand what you're getting into the highest price. If there is an interest rate, this goes to the lowest bidder. Remember, the lower the interest rate you offer on the certificate of tax deposit, the lower the potential profit. A bidding war for tax rights can lower interest rates - and thus profits.

Successful investors take over the property.

The winner of the tax deposit auction gets the ownership of the tax deposit certificate. This technically doesn't give them ownership of the property. But it gives them the right to take ownership of the property through foreclosure or get it back when the homeowner finally pays their tax bill.

The investor pays the amount of tax owed.

If you win a Tax Lien auction, you are immediately responsible for paying the tax bill, including any interest or fees owed. Homeowners then have a period of time before the repurchase period expires, at which time they must either pay the new investor or risk foreclosure.

Repayment Or Foreclosure

When you purchase a Tax Lien Certificate, there are two possible outcomes: either the homeowner pays their property taxes or not. If homeowners pay their property taxes, you get back your original investment plus the interest rate you offered at the auction. If a homeowner fails to pay their property taxes, you have the right to initiate a foreclosure.  Depending on the state, the expiration date may require you to initiate the foreclosure within a certain period after purchasing a tax lien. You may lose the right to withdraw your investment if you do nothing. It is important to note that the situation rarely goes this far. Most homeowners pay their tax bills before the foreclosure process begins.

Pros and cons of investing in tax liens

Tax liens investment can have advantages, but it is also important to be aware of the disadvantages.

Benefits of investing in tax liens

  • Interest Income: The return on investment in tax liens comes from the interest homeowners pay when they pay their due tax bills. Interest rates may vary depending on where you live. For example, a tax lien has a maximum interest rate of 18% in Florida and a fixed rate of 12% in Alabama. Note that the interest on the lien is not exactly what you would get if you lowered the interest rate.
  • Initial investments can be passive: Investing in tax liens requires a lot of preliminary research. Investors can passively invest in tax liens without attending auctions or worrying about other intricacies. You can work with a professional from the National Tax Lien Association or a fund manager for a more passive investment.

Disadvantages of Investing in Tax Liens

Before jumping into investing with a tax lien, it's important to understand the downsides. This type of investment carries a high level of risk. Only professional or experienced investors are recommended to make this type of investment.

  • Research and preparation required: Investing in tax liens requires much initial work. To get started, you should be familiar with the properties in your area and do thorough research on their tax liens. You should also investigate other possible liens affecting your ability to claim the property.
  • Time-consuming responsibilities: Apart from the preparatory work, there are also many things to consider after purchasing a tax deposit certificate. First of all, you need to know all the deadlines and communicate with the owner to get your money. If homeowners don't pay their tax bills, you are responsible for filing foreclosures, which takes time and experience.
  • Expiration Date: It is important to note that tax deposit certificates have an expiration date. If you do not receive a payment or foreclosure by a certain time, you lose your right to receive it.
  • Abandoned Properties: It is important to research the property's condition before bidding for a Tax License Certificate. If you have to mortgage a house, you become the owner. The cost of restoring or selling the property can eat into your profits.
  • Competition: It is sometimes difficult to find a viable tax lien because commercial institutions such as banks and hedge funds can easily outperform individual investors.
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How can I start investing in tax rights?

Considering investing in a tax lien? The first step is determining the type of property you want to bid on. Are you interested in single-family homes or commercial real estate? It is very important to do your research first. Once you've decided to participate in a tax lien auction, contact your local tax office. They have information about local Tax Lien auctions and can tell you what it takes to enter. Remember that not all states allow the sale of Tax Lien Certificates, so this may not be an option in your area.

The most important step in this process is researching each property. Before bidding for a lien certificate, it is important to understand the property's value and current condition. Make sure you understand all payment terms and deadlines before bidding. Finally, ensure you fully understand what is involved in foreclosure, as it can go far.


Tax lien investments are an indirect way to invest in real estate by purchasing tax lien certificates for unpaid property taxes. These certificates become feasible in the likely scenario of homeowners paying their tax bills. While they can offer great returns, it is important to understand the significant risks involved with this type of investment.

In need of a Tax Lien Certificate? The Tax Lien Code is ideal for those who want to save money on taxes. With the Tax Lien Code you can easily find the latest Tax Lien information because our database is updated daily. Call the Tax Lien Code today and save as much money as possible on your property.