Home Blog What Are Tax Lien Certificates (Explained: All You Need To Know)

What Are Tax Lien Certificates (Explained: All You Need To Know)

Looking for Tax Lien Certificates?

What are Tax Lien Certificates?

What’s important to know about them?

Keep reading as we have gathered exactly the information that you need!

Let me explain to you how Tax Lien Certificates work and why they matter!

Are you ready?

Let’s get started!

What Are Tax Lien Certificates

Tax lien certificates are claims registered against a property for nonpayment of property taxes that are sold to private investors.

In other words, if a property owner does not pay his or her property taxes, the government will place a tax lien on the property, create a tax lien certificate for the value of the delinquent tax, interest, and penalty, and sell it off in an auction to private inventors.

When property taxes are due and the government places a tax lien on the property, the owner can pay the outstanding balance and have the tax lien removed.

However, if the property owner is unable to pay the outstanding taxes, after a certain period of time, the government can auction off a tax lien certificate to investors.

In essence, the tax lien certificate is an investment instrument allowing the government to recover unpaid taxes and investors to generate high returns on their investments.

Keep reading as I will further break down the meaning of tax lien certificates and tell you how they work.

Recommended article: What happens if you don’t file your taxes

How Are Tax Lien Certificates Sold

A tax lien certificate is when a county or municipality where a property having unpaid taxes is located sells tax lien certificates at auctions.

The government sells the tax lien certificate to investors who make the lowest bid on the interest rate they wish to earn by purchasing the tax lien certificate.

Consider the tax lien certificate as an investment instrument where investors are looking to earn high interest on their principal.

The tax lien certificate will then allow the investor to collect the unpaid taxes plus the applicable interest rate.

Although the tax lien certificate will offer the prevailing rate of interest, you can expect the interest rates to vary between 8% to 30%.

If the property owner does not pay the outstanding taxes, then investors could then acquire the property to become the legal owner.

However, in most cases, the tax lien certificate is redeemed before the property goes into foreclosure.

Also, you can expect that tax lien certificates carry a term of one to three years.

Recommended article: What is an effective tax rate

Pros And Cons of Tax Lien Certificates

There are advantages and disadvantages to investing in tax lien certificates.

The most notable advantage is that tax lien certificates can be great investment opportunities given the investors great returns.

You can expect tax lien certificates to offer rates of return ranging between 8% to 30% which is much higher than other investment options, such as mutual funds or some types of stocks.

Another advantage is that you can buy tax lien certificates without having the obligation to invest at least a minimum amount of money like some mutual funds.

This means that you can invest small sums of money in different certificates to diversify your risk.

On the flip side, tax lien certificates do have drawbacks.

One important drawback is that investors are required to pay for the tax lien certificate in a very short period of time spanning just a few days at most.

Also, an investor buying tax lien certificates will have to accept that he or she will not be able to easily sell them in the open market as there are no secondary tracking markets available for such investment instruments.

In addition, investors should be cautious of the level of risk they are taking on tax lien certificates as they must ensure that the underlying property is worth what it is assessed for.

Recommended article: Understanding ad valorem taxes

Tax Lien Certificates FAQ

What is a tax lien certificate?

A tax lien certificate is an investment instrument offered by local counties and municipalities as a means to recover property tax dollars owed and unpaid by property owners.

Typically, tax lien certificates are sold through an auction to the investor that bids for the lowest rate of interest or offers the highest cash investment.

Does a tax lien certificate give you title to a property?

The tax lien certificate issued by a local government or municipality provides investors the right to collect an amount equivalent to the taxes owed on a property.

However, tax lien certificates do not transfer title or ownership of the property to the investor.

For the property title to be transferred, the property owner must be foreclosed according to the local rules.

How do you find tax lien certificate investments?

Investors looking to invest in tax lien certificates can find them by contacting their local government.

If the local government offers such investment instruments, it is usually done at a public auction where investors come and bid on the certificates.

Not every state offers tax lien certificates so you’ll need to inquire to see if it’s offered in the first place.

Recommended article: What is a depreciation tax shield

Takeaways 

So there you have it folks!

What are tax lien certificates?

In a nutshell, tax lien certificates refer to a lien certificate created by a municipality or county representing the amount of taxes owed on a property along with interest and penalty.

The municipality will then sell the tax lien certificate to private investors who end up investing an amount equivalent to the amount of back taxes on the property.

This way, the government is able to recover the delinquent tax dollars by selling its claim to private investors.

Tax lien certificates are generally sold in auctions to the bidder asking for the lowest rate of interest or the one paying the highest bid for cash.

Now that you know what is the meaning of a tax lien certificate and how it works, good luck with your research!

Tax deed 
Tax lien 
Foreclosure meaning 
Tax sale
Tax service fee
Escrow meaning 
Back taxes 
Deed of trust
Property foreclosure 
Offer in compromise 
Property tax
Author

Editorial Staffhttps://lawyer.zone
Hello Nation! I'm a lawyer and passionate about law. I've practiced law in a boutique law firm, worked in a multi-national organization and as in-house counsel. I've been around the block! On this blog, I provide you with golden nuggets of information about lawyers, attorneys, the law and legal theories. Enjoy!

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