Tax Lien
A Tax Lien is a mortgage-backed tax bond issued by the county of a US state for an unpaid tax on a landowner or property owner. These tax liens are offered by the counties to investors to collect overdue taxes. A tax deed is a title deed for a plot of land or a property that is already in the possession of the counties due to tax debts of the owners and is also offered for sale by them.
Due to the technical advancement, every private investor is able to purchase tax liens and / or tax deeds online from home - today - in around 180 counties.
Legal basis
The land and real estate (private and commercial) tax imposed in each state in the United States is the county's primary source of income for schools, hospitals, fire departments, and police. Every American state has its own set of laws. These laws differ in terms of the amount of the interest rate for the property owner and the duration of the repayment period and the duration of a tax line.
The first Tax Liens were issued in 1798 and are therefore based on a law that was introduced over 300 years ago and which all 50 US states (with over 3,500 counties) practice in different variations. Although it is well known that the US federal finances are in dire need of money, changes in the law at Tax Liens are extremely rare - and if they do - then it can be assumed that they will be interpreted in favor of the counties (i.e. in favor of the investors), thus the counties get their tax money faster and use them accordingly.
Around half of all 50 US states offer tax liens. Classic Tax Liens states are Oklahoma (8% p. A.), Arizona (16% p. A.), Iowa (24% p. A.), Maryland (18% per semester), Illinois (18% per semester). There are also Tax Deeds States, Hybrid States, and Redeemable Deeds States.
- Tax Deeds States
In Tax Deeds States, the counties keep the tax liens and wait to see if the debtor fulfills his obligations. If he doesn't, the county will start recycling. Many counties offer this property for the equivalent of the outstanding debt, i.e. less than 10% of the current market value. In states such as New York the auction prices are generally d. Usually to have over 60% of the market value. Tax Deeds states include California and New York.
- Hybrid states
Hybrid states are states that offer both solutions, both tax liens and tax deeds. In these countries, the OTC (over the counter) share is quite high, so that in addition to classic auctions, you have the option of buying interesting objects at a very attractive price. A classic hybrid state is, for example, Florida (18% p. A.).
- Redeemable deeds
Redeemable Deeds means that after the acquisition of a property (analogous to Tax Deeds) the debtor still z. B. has 2 years to pay off his debts after taking over the property. It is interesting because classic tax liens i. d. Usually cost a few hundred or thousand USD (there are of course no upper limits), but with Redeemable Deeds the investor purchases a property for several tens of thousands of USD and receives the interest on this investment amount. A redeemable state is Texas (25% p. A.).
Sales process
If a tax debtor pays his tax too late, the county has the right to issue a tax lien for it and offer it to investors in auctions. This tax bond has priority over all other liens, such as a bank mortgage . If the tax debtor pays his tax within the granted repayment period (redemption period), an additional penalty tax is due on it, the amount of which differs depending on the state. The tax lien owner will then receive a refund from the county for the value of the tax lien and the penalty tax. If the tax debt is not paid within the legally prescribed repayment period, the Tax Lien owner can apply for foreclosure and thus become the owner of the property or property. In some states, however, tax liens are not sold, but tax deeds. If a tax debtor has not paid his tax within the set deadlines, the county becomes the owner of the property or real estate. These counties then sell the tax deeds to investors and the investor becomes the owner of the property.
Each state in the United States regulates the repayment period for the tax that is not paid on time. This period is 120 days to five years, depending on the state. Every Tax Lien owner has the opportunity to start the "foreclosure process" (transfer of ownership ) after the repayment period has expired in order to enforce his claims against the tax debtor. For this purpose, a lawyer must be called in to prepare all required and legally recognized documents. Since a tax lien has priority by law, all other creditors lose their claims. After completing this process, the investor receives the ownership rights to the property (see also #Advantages of a tax deed investment ). If there are several liens on a property, the first obligee has the right of realization and must also pay the other tax liens (annual land charge plus accrued interest, possibly fees).
The return on an investment in US Tax Liens results from the statutory penalty tax and is between 8 and 36% per year. The returns on tax deeds can be far higher as the counties offer the tax deeds at the value of the overdue taxes plus penalty tax and fees in auctions. These land and real estate can be sold by investors at the market price after they have been purchased. Real estate can be rented out and brings a continuous return.
Auctions
Tax liens and tax deeds are sold at auctions that take place on-site in the county's office on fixed dates or through online auctions . Investors outside of the US can only invest through online auctions.
Depending on the state, there is a fixed procedure according to which auctions are carried out and which investors must adhere to precisely.
- Bid Down the Interest / Bid on the lowest acceptable return
The maximum possible return is determined depending on the state. In the auction, the bidder with the lowest offer wins the bid. Example: the maximum yield is 18% and bidders can bid down in 0.25% steps, in some countries even down to 0%. If several investors offer the same value, then z. B. the lot or it is passed on with a rotation process.
But here too there are exceptions, such as B. in Florida, even those who bid 0.25% receive a minimum return of 5%.
- Premium bid / premium bid
With this method, the investor with the highest bid for the Tax Lien value is awarded the contract. Sometimes you get a return on this surcharge, but in most cases you do not get it and therefore this “premium surcharge” reduces the total return .
- Random Selection
With this method, the first bidder who can submit a bid is selected by lot or by computer. In smaller counties with live auctions, this is also done by the auction manager.
- Rotational Selection / Rotation Selection
In this method, the bidder / investor with bidder number 1 is the first to have the opportunity to bid on Tax Lien No. 1. If bidder No. 1 does not submit a bid, then bidder No. 2 is requested to submit a bid. If the Tax Lien is sold or if no bidder submits a bid, then bidder No. 2 is the next option to bid on Tax Lien No. 2, etc. With this method, the bidder has no influence on which Tax Lien he is bidding on Can bid.
- Bid Down the Ownership / Bid on the lowest percentage of ownership of the property
The investor who is willing to accept the smallest amount of real estate liens on the property receives the Tax Lien. This method is used in only a few states; B. Iowa . So if an investor offers 50% ownership rights and he receives the tax lien and the tax lien is not paid within the repayment period, then the bidder only receives 50% claim rights to the property, 50% remains with the property owner. This method usually requires the involvement of lawyers and is therefore expensive and complicated to process.
Tax liens that are not sold in the auctions become the property of the county. In some states, these tax liens can be purchased directly from the county in so-called OTC sales ( Over The Counter ), so to speak, "over the counter". Other states are selling these tax liens at their next auctions.
Benefits of a tax deed investment
If a tax debtor does not pay real estate tax within the permitted repayment period, this property or land becomes the property of the county by law. These properties are auctioned through public auctions, both on-site in the government building and online auctions. The minimum price offered for the property consists of all tax debts plus interest plus any penalty tax plus all taxes and fees associated with the sale. The bidder with the highest bid wins the bid. Depending on the competition in sales, real estate can be purchased well below the current market value. If these properties are then sold in the open market, double-digit returns can be achieved very easily. Another alternative is renting out the property, as this can generate additional, passive income.
Challenges in tax lien and tax deed investments
- Legal regulations
Each state has its own specific rules for the Tax Lien or Tax Deed sales process. These regulations must be strictly adhered to; failure to observe them in most cases can result in a total loss of the investment.
- Auction regulations
Payment of the tax line or tax deed is precisely defined in terms of type (cash, check, bank transfer), day and time. Failure to comply can also lead to loss of advance payment and entitlement.
- Title clearance / clarification of external claims
At the latest after purchasing a tax deed, all external claims must be clarified. This is necessary because insurance can only be taken out once all external claims have been clarified and resolved. This insurance is required in order to be able to sell the property on the open market. Claims from state government authorities (tax authorities, etc.) always have priority and must be served.
- Validity of tax liens
Each Tax Lien has a legally defined period of validity (7 years, 10 years, etc.). If the Tax Lien owner does not apply for a foreclosure within this period, the Tax Lien will be irrevocably worthless after this period has expired.
literature
- German literature
- Árpád von Tóth-Máté / Ádám Keresztes: The Alchemy of Financial Success: Tax Liens - With Interest Strategies to Prosperity , Cashflow Business Academy, Zurich, 2014, ISBN 978-963-08-6899-0
- Árpád by Tóth-Máté: Americas Strangest Secret! Tax Liens: With Interest Strategies for Prosperity , RichFamily Publishing, 2018 ISBN 978-615-00-0270-5
- Árpád von Tóth-Máté: Dream life with real estate - 7 possible ways to real estate pension , Publisher: RichFamily Publishing, 2019 ISBN 978-3-9525116-0-2
- English literature
- Árpád von Tóth-Máte / Ádám Keresztes: "The Alchemie of Financial Success: Tax Liens: Attaining prosperity with interest rate strategies", Zurich, ISBN 978-963-08-9745-7
- Larry B. Loftis: Profit by Investing in Real Estate Tax Liens: Earn Safe, Secured, and Fixed Returns Every Time. Dearborn Trade Pub, Chicago 2005, ISBN 0-7931-9517-9 .
- Chantal Howell Carey: Make Money in Real Estate Tax Liens: How to Guarantee Your Return Up to 50%. Wiley, Hoboken 2005, ISBN 0-471-69286-7 .
- Chip Cummings: Zero Risk Real Estate. Wiley, Hoboken 2013, ISBN 978-1-118-35647-0 .
- Dustin Hahn: Tax Liens and Deed Investing Quick Start Guide. Dustin Hahn International 2013
- Don Sausa: Investing Without Losing: The Beginner's Guide to Real Estate Tax Liens and Tax Deed Auctions . Vision Press 2006, ISBN 978-0978834609
- Larry Loftis: Profit by Investing in Real Estate Tax Liens: Earn Safe, Secured and Fixed Returns Every Time . Kaplan Publishing 2007, ISBN 978-1427795953
- JD Joel S. Moskowitz: The 16% Solution: How to Get High Interest Rates in a Low-Interest World with Tax Lien Certificates, Revised Edition . Andrews McMeel Publishing 2009, ISBN 978-0740769627
- Joanne M Musa: Tax Lien Investing Secrets: How You Can Get 8% to 36% Return on Your Money Without the Typical Risk of Real Estate Investing or the Uncertainty of the Stock Market! CreateSpace Independent Publishing Platform 2015, ISBN 978-1497426023
Individual evidence
- ↑ irs.gov: Understanding a Federal Tax Lien , accessed September 24, 2013
- ↑ 26 US Code § 6321 - Lien for taxes. Retrieved April 18, 2017 .
- ↑ Mark P. Cussen, CFP®, cmfc, AFC: Investing in property tax liens . In: Investopedia . June 13, 2013 ( investopedia.com [accessed April 18, 2017]).
- ↑ a b c What States Allow the Sale of Tax Lien Certificates? ( chron.com [accessed April 18, 2017]).
- ↑ Amy Brown: How Do Tax Lien Sales Work: Can You Buy Tax Lien Properties to Save Big? ( courthousedirect.com [accessed April 18, 2017]).
- ↑ a b c d e f Money-zine.com: Tax Lien Investing. Retrieved April 18, 2017 .