A Wise Investment: Your Guide to Investing in IRS Tax Liens

Estimated reading time: 3 minutes

In an age where interest rates are at rock-bottom, and the US property market no longer promises strong returns, alternative forms of investment are on the rise.

One of these is tax liens, which have attracted billions of dollars of investment in recent years. Put simply; an IRS tax lien is when the government places a ‘lien’ on a property where the owner has not paid their taxes.

The government can then sell that lien to an investor as a means of recouping delinquent taxes.

If you have the know-how, determination, and skill to make a success of it, then investing in federal tax liens can be a significant boon to your portfolio. Read on to find out everything you need to know. 

1. How Do I Invest in an IRS Tax Lien?

If you want to invest in an IRS lien on property, then you will need to bid for a lien at auction.

The IRS and local governments routinely organize lien auctions, both online and at auction houses. You can conduct an IRS tax lien search online to find out where and when your nearest auction is taking place. 

Here, you can bid against other investors to obtain the rights to a delinquent taxpayer’s lien.

Typically, the winner is whoever is willing to pay the highest premium or accept the lowest rate of interest. If you bid successfully, the lien is yours. 

2. How Do I Make Money from a Tax Lien? 

A common misconception of a federal lien is that you can use it to gain control of a property and flip it. However, this almost never happens, and there are a ton of laws in place to prevent this from happening.

Instead, investors make money from the interest that the property owner must pay on the lien. Their overdue tax goes, naturally, to the IRS. Any interest due on that overdue tax goes directly to you – or in other cases, your Self-Directed IRA.

Most homeowners (about 98%) manage to redeem their property before the foreclosure process can begin. This means that you should not expect a bargain-basement home as a result of your investment. 

3. Do I Gain Ownership of the Property? 

As mentioned already, you will most likely not gain ownership of a property once you have invested in a federal tax lien.

If the homeowner does not manage to clear their debts, you do reserve the right to begin the foreclosure process.

If this is successful, then you will be able to take control of the property. However, this is a vanishingly rare occurrence, and you should not count on it when making your investment. 

4. What Are the Risks Involved? 

No investment is risk-free, and this is especially true of tax liens. If property owners refuse to pay their taxes or interest, then you won’t get a dime. Your only option after this is to begin foreclosure.

This will involve considerable expense on your part that might nullify the initial investment returns. You will have to hire security and clearance professionals to help you vacate the property.

After this, you will have to deal with the expense and effort of home maintenance in your attempt to sell. Also, even when bidding for a lien in the first place, you might find that interest rates are driven so low that it is barely worth it. 

Learn More 

Investing in an IRS tax lien can be challenging, but the returns can be substantial. In order to fully understand the ins-and-outs of tax investments, make sure to contact a Quest IRA specialist today for all of the expert advice to learn more about how these types of investments can be done in a Self-Directed IRA. To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.