Tax liens are claims by a government entity, typically a state or local government, on a property for unpaid property taxes. The government auctions off tax liens to investors to recoup the owed taxes, and the investor can then earn a return on the investment in the form of interest on the debt. Failure to pay a tax lien may allow the lien holder to foreclose on the property.
To invest in tax liens, an individual can research upcoming tax lien auctions in their area and participate in bidding. If they win the bid, they will become the lien owner and be responsible for collecting the debt, including any accumulated interest, from the property owner.
Studies have shown that tax liens can offer attractive returns, with interest rates that often exceed those of traditional fixed-income investments. For example, a 2019 study by the Tax Lien Lady found that tax lien returns in the United States ranged from 8% to 36%, with an average return of around 12%.
Investing in tax liens through a retirement account, such as an IRA or a 401(k), is possible. Still, it requires careful consideration of the rules and regulations governing these types of accounts.
Here are some steps for using tax liens in a retirement account:
- Choose the right type of retirement account: Consider setting up a self-directed IRA or a solo 401(k) plan, as these types of accounts offer the most flexibility for alternative investments, including tax liens.
- Research the tax lien market: Invest time in researching the tax lien market in your area, including the process for buying and selling tax liens and the potential risks and returns.
- Work with a professional: Consider working with a professional financial advisor specializing in tax liens or a self-directed IRA custodian who can help guide you through the process.
- Follow the rules: Make sure to comply with all applicable laws and regulations, including the rules for investing in alternative assets through a retirement account.
- Diversify your portfolio: As with any investment, it is important to diversify your retirement portfolio to minimize risk. Consider including tax liens as just one part of a well-rounded investment strategy.
It is important to keep in mind that investing in tax liens through a retirement account can be complex and may not be suitable for everyone. It is crucial to do your research and carefully evaluate the potential risks and benefits before making a decision.
As with any investment, there are risks and benefits to consider with tax liens. On the one hand, tax liens can offer a relatively high rate of return, with interest rates often exceeding those of traditional fixed-income investments. On the other hand, there is always a risk that the property owner will not be able to pay the debt, leaving the investor with a potentially difficult and time-consuming process to collect their investment.
It is important to thoroughly research and understand your area’s tax lien process and regulations before investing. It may also be a good idea to consult with a financial advisor to determine if tax liens align with your investment goals and risk tolerance.