Understanding Tax Liens in a Self-Directed IRA

Understanding Tax Liens in a Self-Directed IRA

Investing in tax lien might not sound exciting, but for many investors, it’s a creative, flexible, and powerful way to save for retirement. How? When properly invested, tax liens can carry significant benefits for the investor, and many of these benefits can be largely passive. For someone who uses a Self-Directed IRA, those benefits then extend to the tax benefits of holding assets within a retirement account.

In many ways, investing in tax liens is a different way to invest in real estate. But it’s not quite the same as buying up a rental property and using that within an IRA. A tax lien has its own rules and its unique quirks—and it’s well worth learning them if you want to find out how to include an asset like this in your portfolio:

Understanding Tax Liens

First things first: what exactly are tax liens, and how might they factor in an individual’s retirement plan? Here at American IRA, we feature a page that goes through the basics on tax liens. But let’s examine the key points right here:

  • The key benefit of tax liens is that when properly invested, they can generate extremely high interest rates in return for the investment. In many states, there is the additional possibility that an investor can take over the property in the event of non-payment. However, it’s worth noting that this will vary tremendously from state to state.
  • Investors get to choose what happens in some cases, which means that tax liens can be a very creative way to invest. For example, in the case of a foreclosure, it’s then up to the investor to choose whether they want to sell the property and potentially take a profit, or hold the property and use it to collect rental income thereafter. It’s ultimately up to the individual state rules and the investor’s preference, depending on the property in question and other factors that weigh on real estate such as location and local demand.
  • It’s a good idea to consult with professionals as you seek advice on a tax lien. One of the most important ways to do this is to have a property appraised to assess the value of a property before you decide to make the investment. After all, even a slight inaccuracy in that way can mean that you end up with a property that’s not at all what you thought it was. With tax liens, you want to be sure that you go into the investment with as accurate an assessment of the overall viability of the asset as possible.

The Unique Quirks of Tax Lien Investing

What happens when you purchase a tax lien? When a local government puts a lien on a property, you can purchase this tax lien, essentially paying the tax debt on the property. The debt is then transferred to your ownership. You don’t get to say everything you want about how this debt is to be repaid—for example, in Florida, there is a maximum interest rate of 18%.

But you do have lots of options. Tax lien investing can benefit the local government because it means that they get taxes paid back. And because you’ve moved a real estate asset of a unique type in your portfolio, you may have a more diversified retirement strategy as a result.

Tax lien investing requires a sharp eye and thorough knowledge of how it works. That’s why we recommend reading up on tax liens before you try anything—and always work with a great Self-Directed IRA administration firm. Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.