Tax Lien Certificate Definition

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Tax Lien Certificate Definition

What Is a Tax Lien Certificate?

A tax lien certificate is a claim certificate issued against a property that has a lien on it due to unpaid property taxes. Tax lien certificates are often sold to investors at auction.

Breaking Down Tax Lien Certificate

A tax lien certificate is a lien imposed on your property as a result of failing to pay your taxes. The municipality will issue a tax lien once your property taxes are due. The lien is eliminated when you pay your taxes on time. If you do not pay your taxes or do not pay them on time, the municipality or county will sell the tax lien certificate to an investor at auction (s).The investor will subsequently pay the taxes on the property tax owner’s behalf.

How Tax Lien Certificates are Sold

Tax lien sales auctions are often held by the county or municipality in which the property is located. For a property to be eligible, it must be declared tax-defaulted for a minimum term based on municipal rule. Rather of bidding on the property itself, interested parties bid on the interest rate they are prepared to accept. The lowest-bidding investor wins the auction and receives the tax lien certificate.

Once You’ve Bought a Tax Lien Certificate

When an investor wins a bid for a particular tax lien certificate, a lien is put on the property and a certificate specifying the due taxes and penalties on the property is provided to the investor. Tax liens are not available in all states, counties, or municipalities. Some governments, such as California, only have tax auctions on delinquent properties, with the successful bidder becoming the legal owner of the property.

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Tax lien certificates normally have a period of one to three years. The certificate allows the investor to recover unpaid taxes as well as the appropriate prevailing interest rate, which may vary from 8% to more than 30% depending on the jurisdiction.

Rate of Return on Tax Lien Certificates

Tax lien certificates may provide rates of return that are much greater than those given by other investments due to the high state-mandated rates of interest. Tax liens usually take priority over other types of liens, such as mortgages. If the property owner does not pay the back taxes, the investor may be able to buy the property for pennies on the dollar. Acquiring a property in this way is unusual since most tax liens are redeemed before the property falls into foreclosure.

Associated Benefits and Risks of Tax Lien Certificates

Purchasing a tax lien certificate may be a lucrative investment at times. Some of the certificates have a low entry point, which means they may be purchased for a few hundred dollars. In comparison, a conventional investment, such as a mutual fund, sometimes has a minimum investment requirement. You may also split your funds so that you can purchase numerous certificates for a low dollar value. Finally, as previously said, the rate of return is typically rather steady, so you won’t have to worry about market ups and downs.

Negative elements of tax lien certificates include the obligation for the investor to pay for the tax lien certificate in full within a relatively short time, generally one to three days. These certificates are also exceedingly illiquid as there is no secondary trading market for them. Tax lien certificate investors must also do extensive due diligence and study to guarantee that the underlying properties have an adequate assessed value.

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An example discussing the necessity for due diligence while investigating tax lien certificates is a two-acre lot that may first appear to be a reasonable purchase, but it’s really a strip of property that is only 3 feet wide by 5 miles long. This makes the property useless for many pursuits, such as establishing a house or a company.

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