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A Quick Guide to Tax Lien

A Quick Guide to Tax Lien

A Quick Guide to Tax Lien Investing: Understanding the Basics

Tax liens are a form of investment that can provide a steady stream of income to those who are willing to take the time to understand the process. Put simply, a tax lien is a legal claim that the government places on a property when the owner fails to pay their property taxes. Investors can buy these liens, and then collect the unpaid taxes plus interest once the property owner pays them off. In this guide, we’ll take a deeper look at what tax liens are, how they work, and how to invest in them.

What are Tax Liens?

When a property owner fails to pay their property taxes on time, the government has the right to place a lien on the property. A tax lien is a legal claim that the government files against the property, to ensure that the taxes owed will be paid. The lien gives the government the right to seize the property and sell it to collect the unpaid taxes. However, rather than taking ownership of the property, the government can sell the lien to a third-party investor at an auction. This is where tax lien investing comes into play.

How Do Tax Liens Work?

Tax lien investing works through a competitive bidding process held by local or state governments. The bidding process can take place either in-person or online and typically requires a minimum bid amount. The investor who makes the highest bid wins the lien, and the right to collect the unpaid property taxes and any interest that has accrued. The interest rate on a tax lien can vary depending on the state or locality, but it can be as high as 18-24%. The interest rates are set by individual states and vary depending on the competition at the auction.

The property owner must pay the investor the unpaid taxes plus interest before the lien’s redemption period. The redemption period is the time frame given to the property owner to settle their tax bill. The period can vary from state to state, typically ranging from 6 months to 3 years. If the property owner fails to redeem the lien by paying the investor the back taxes and interest, the investor can foreclose on the lien and force the sale of the property to pay off the lien amount.

Why Invest in Tax Liens?

Tax liens can provide a unique and lucrative investment opportunity for those looking to earn passive income. The process is straightforward and doesn’t require a lot of initial investment capital. Additionally, unlike other forms of real estate investing, tax liens provide more significant returns without the need for physical maintenance or repairs to the property.

How to Invest in Tax Liens

Step 1: Research the State Laws

The first step to investing in tax liens is to research and familiarize yourself with your state laws and regulations regarding tax liens. Each state has its own set of laws, and it’s essential to understand them before you invest. Several online databases provide information on tax lien auctions and sales across the country. A great place to start researching is the National Tax Lien Association’s website, which contains helpful information on tax lien investing.

Step 2: Attend a Tax Lien Auction

After researching the state laws, the next step is to attend a tax lien auction. The auction provides a hands-on learning experience for first-time investors. It’s vital to understand the auction process, the bidding system, and the minimum bid requirements before bidding.

Step 3: Conduct Due Diligence

Conducting thorough due diligence on the property is crucial before purchasing a tax lien. It’s essential to do your research on the liens you’re interested in to ensure they’re a sound investment. Some factors to consider when conducting due diligence include:

– Property’s Worth: Obtain an appraisal of the property through a licensed appraiser. This helps determine the property’s worth and whether it’s worth the investment.

– Title Search: Conduct a title search on the property to ensure it’s unencumbered. A title search can determine if the property has any other existing liens that can prevent you from enforcing your tax lien.

– Property Location: Make sure to visit the property and check for any structural issues or other issues that can prevent the property from selling.

Step 4: Bid on the Tax Lien

After conducting due diligence, the next step is to bid on the tax lien. When bidding, it’s important to have a clear strategy outlined beforehand, including your maximum bid and the maximum interest rate you’re willing to accept.

Step 5: Collect Payment

If you win the auction, the final step is to collect payment from the property owner. After the redemption period ends, the property owner must pay the back taxes and the accrued interest on the lien. If the property owner fails to do so, you have the right to foreclose on the property and collect your investment.

Risks Involved in Tax Lien Investing

As with any investment, there are risks involved in tax lien investing. Some potential risks include:

– Risk of Property Damage: If the property owner defaults on paying property taxes, they may also neglect maintaining the property, leading to additional issues that could reduce the property’s value.

– Risk of Redemption: There is a chance that the property owner will redeem the lien during the redemption period, reducing the potential return on investment.

– Risk of Low Return: With increasing competition in the tax lien market, there is a possibility of a low return on the investment due to a lower interest rate.


Tax lien investing is an opportunity for investors to earn passive income while contributing to the local government’s revenue. Understanding the investment process, conducting thorough due diligence, and properly assessing the risks and rewards are essential to a successful investment in tax liens. With careful research and a well-planned strategy, investing in tax liens can be a lucrative, low-risk investment opportunity.

Tax liens are legally allowed in cases where individuals have fallen behind on tax payments. The tax lien is imposed upon property so that the debtor will pay those taxes, even if the property is sold. In some cases, the tax lien requires that the price of the lien be included in the sales price of the property and in others, the owner cannot sell the property unless the lien is paid first.

Tax liens can be imposed when an individual or entity has failed to pay property taxes or income taxes. Those that purchase a piece of property, at foreclosure for instance, are now responsible for tax liens against the previous owner.    Although the tax lien should be disclosed at the time or purchase, that is not always the case. The county searcher should discover any tax liens during their search, which then becomes the responsibility of the title company if the lien was not discovered or disclosed.

Tax liens can be paid in a variety of ways. The property may be seized and sold in order to pay any delinquent taxes. The tax lien may also be paid from an escrow account, which would likely be through the bank that holds the mortgage on the property. In fact, a tax lien takes priority over mortgages and they should be paid before the bank collects monies for mortgage payments.