Property Tax Liens in your IRA?

Due to the unpredictability and volatility the stock market has seen, many investors are looking for alternative investments to generate wealth. Growth in the self-directed IRA industry, has contributed to many alternative investments gaining in popularity. One investment that is a leading beneficiary of money leaving the stock market in pursuit of security - is tax liens.

Essentially every piece or real property has taxes assessed on them each year. This includes, but is not limited to raw land, residential homes, commercial property, skyscrapers and more. Essentially every county in the United States levies property taxes. Each year the county will bill the property owner for taxes due from the prior year. The taxes provide the capital so the county can ensure community services (e.g. – police, fire, schools, and libraries) have the necessary funding to operate. If the property owner does not pay their tax bill by a certain date, the county will place lien on the property for the amount due. Interest and costs are charged by the county. Otherwise, no one would pay on time.

If the money is not collected in a timely manner it would be problematic to the county and the services that it provides to our community. In order to make sure the county has the adequate funding, it will lien the property and then sell the lien to an investor. In most cases, the investor will take a first position lien on the property (in front of the first mortgage) and the lien will accrue interest and/or penalties from the date the of the investor’s purchase. Once the homeowner repays the lien back – the investor gets their original investment plus the interest and/or penalties back.

Tax liens can be a wonderful investment because they are secured against real property, have predictable rates of return and are administered by the government. They are however illiquid for a period of time which can range from 6 months to 2 years. Although Washington is not a tax lien state (it offers tax deeds instead), many state offer very attractive rates. For instance, Arizona offers up to 16% annually while Texas offers 25% per year – secured against real property and does not require much capital! Liens can range from a couple hundred dollars to well over a million. This gives all investors, big and small, opportunity to invest in tax liens.

In the past 5 years, self-directed IRAs have gained traction with inwithin the investorinvestment community because of the flexibility offered through these accounts. Self-directed IRAs give the investor the ability to purchase non-traditional investments like real estate and tax liens, as well as, stocksstocks, bond and mutual funds. Tax liens are a tremendous vehicle for building wealth however not every lien is a windfall purchase. Spend some time getting to know the counties lien system before you purchase and do your do diligence.