Few IRA holders realize they can use their retirement account funds to invest in tax liens. When you self-direct your IRA or Solo 401(k) Plan, your tax lien investments are tax-deferred. Tax liens are a lesser known and under-appreciated money-maker. However, learning how they can magnify your earnings in a tax-deferred IRA or 401(k) will make them among the soundest investments in your IRA.
Purchasing Tax Liens with Retirement Funds
Tax liens may be purchased using retirement funds. The purchase of tax lien certificates is a surprisingly safe investment, and the use of a Self-Directed IRA is one of the most tax efficient ways to finance your tax lien purchase. The primary advantages of using a self-directed IRA to make tax lien investments are as follows:
- Investment flexibility
- Steady Income Generator with no tax bite
– Tax Deferral
– Gains from the tax liens investment will flow back to the Self-Directed IRA - Control
- Diversification
- Tax Advantaged Investing
What is a Tax Lien?
Purchasing tax lien certificates is one way to get real estate exposure in your portfolio without investing in any property. While sophisticated investors can make decent returns by investing in tax liens, novices can easily get burned. Here’s how it works: When a property owner fails to pay his or her taxes, the municipality in which the property is located can sell its tax lien — the right to foreclose on a property when the owner has failed to pay taxes.
The winner of a tax lien certificate is typically the investor willing to accept the lowest interest rate. Most tax liens purchased at auction are sold at rates between 3 percent and 8 percent nationally. The property owner has a redemption period — generally one to three years — to pay the taxes plus interest. If the property owner fails to pay the property taxes by the end of the redemption period, the lienholder can initiate foreclosure proceedings to take ownership of the property. However, this rarely happens because the taxes are generally paid before the redemption date. The interest rates make tax liens an attractive investment.
Types of Tax Liens
There are two types of tax lien sales through auction: the tax lien certificate and the tax lien deed. Both can be a safe yet profitable opportunity for investors with checkbook control.
Tax Lien Certificates
Tax Lien Certificate sales offer the delinquent homeowner one last chance to retain ownership of their property. This occurs by using third-party investment money to pay off the taxes and give them a bit more time to collect the money necessary to pay their debt without the risk of losing their home.
When an investor bids on a tax lien certificate, he is in essence agreeing to loan the homeowner the money necessary to pay all taxes due. The homeowner, in turn, agrees to pay back the tax lien certificate holder – with interest – by a specified date.
If the homeowner fails to pay the debt on time, the deed to the property is transferred to the investor for the amount paid on the taxes. Either way, the investor makes a profit. Either on the interest he earns on the loan, or by obtaining the property for a fraction of its value through the tax lien sale, and then reselling it.
Tax Lien Deed
Tax Lien Deed sales are handled a bit differently since the investor is actually bidding (or buying), the complete property at the time of auction. The investor has no responsibility to give the homeowner more time to pay his/her tax debt.
Once the selling price is approved, the deed is automatically transferred to its new owner. This gives the investor full reign as to what to do with the property next: renovate it, sell it as-is, or raze the existing house and build anew.
Investors usually pay more for properties in this type of tax lien sale, which may lower their profit margins in comparison to the acquisition of tax lien certificate properties.
But many investors prefer outright purchases to eliminate problems with current homeowners. Either way, this is a profitable and easy way to enter the real estate market in virtually any area.
Facts & Opportunities Surrounding Tax Liens
Real estate has long been considered one of the best (and safest) investment opportunities for both the large and small capitalist. Savvy investors know that the trick to making money in a downward spiraling market is to purchase properties for a fraction of their value.
The question is…How? Many are finding the perfect answer in the high-profit possibilities of investing in Tax Lien Sales.
When a property owner falls behind on their taxes, failing to pay for one or more years, the local taxing authority has the legal right to place a lien or repossess the property. They often sell it at auction to recoup the lost tax revenue.
The lien laws in your area detail how long local authorities wait to seize your properties. It also determines how much they allow to be owed in the property.
In many cases, properties can be acquired for a few thousand dollars, regardless of how much it’s actually worth. Similarly, paying off the lien on others may more than the house or land is worth. A savvy investor takes the time to research each property carefully prior to sale day.
Tax Lien Sales
Tax lien sales usually happen at public auctions once or twice a year. This depends on the area in which it is located, and how many properties the government may seize annually for back taxes.
Larger urban areas may hold monthly auctions, while smaller rural ones might only have one a year.
Investing in Tax Liens with Retirement Funds
The use of a Self-Directed IRA is one of the most tax-efficient ways to finance your tax lien purchase. IRA Financial Group’s IRA LLC allows investors to participate in a wide range of investment vehicles including, but not limited to:
- tax liens
- real estate
- mortgages
- franchise
- notes
- stocks and mutual funds
- partnerships,
- Cryptocurrencies and more!
Learn More: Open a Self-Directed IRA Online
The Solo 401(k) Plan
The Solo 401(k) Plan offers a highly attractive loan feature. This can allow for the purchase of tax liens. Under the Solo 401(k) Plan, you can borrow either $50,000 or 50% of their account value – whichever is less.
The IRA Financial Group Solo 401(k) Plan documents will allow you to use a loan from your Solo 401(k) to finance your tax lien purchase.
These unique IRS approved structures are created by IRA Financial Group’s in-house tax and ERISA professionals who personally customize your account structure to suit your needs.
Only a handful of institutions are skilled in these specialized account structures and IRA Financial Group is the “gold standard” for Compliance, Leadership, Customer Service, and Technological Innovation.
Read More: How to Open a Solo 401(k) Online
Are Tax Liens a Good Investment?
While we can’t give you investment advice, investing in tax lien certificates in an IRA or Solo 401(k) has the following benefits:
Double Your Money Quickly
You can supercharge a Self-Directed IRA LLC or Solo 401(k) plan when you buy tax lien certificates.
Example: A tax lien certificate can earn up to 16% annually in your Self-Directed IRA or Solo 401(k). When you buy tax lien investments you generally receive the amount invested plus interest within 12 months.
If you continue to reinvest in tax liens year after year at 16%, you can double your money in about 4.4 years. Only a Self-Directed IRA LLC can preserve this 16% return.
Your Money Grows Tax-Free
When you buy tax liens in an IRA Financial Group Self-Directed IRA LLC or Solo 401(k), you can avoid all taxes until the money invested is withdrawn from the IRA or 401(k). The distribution usually occurs around age 59 1/2.
You can invest the money once, twice or a thousand times. Continue to grow your investments tax-free, so long as it is not withdrawn for personal use. If you use a Self-Directed Roth IRA LLC, your investment will grow tax-free and you can withdraw the funds tax-free once you reach the age of 59 1/2.
The Flexibility to Buy Time Sensitive Investments
IRA Financial Group’s Self-Directed IRA LLC allows you to carry a checkbook that is tied to the account. The Solo 401(k) Plan allows you to serve in the trustee role. This means that all assets of the 401(k) trust are under your sole authority (“checkbook control”).
This gives you incredible freedom to fund the investment at a moment’s notice. In this arrangement, you can buy tax liens with the stroke of the pen. You don’t need a custodian or other bureaucrat saying no or try to slow down the process.
Tax liens are backed and leveraged by real estate and guaranteed by the governmental taxing authority. In most states, they are a first lien on real estate. When foreclosed, they wipe out all junior liens, including mortgages.
This allows you to potentially receive a valuable piece of real estate for pennies on the dollar!
Time to Act
Real property has been the cornerstone of wealth for thousands of years. While ill-informed speculators have fled real estate because of the housing bust, intelligent real estate investors are enjoying immense profits by expanding their geographic scope and investing for predictable income.
Get in Touch
Do you still have questions that were not discussed in this article? You can contact IRA Financial Group directly at 800-472-0646 with your questions. Or fill out the form and speak with an IRA or 401(k) specialist today.
