5 Steps of Tax Lien Investments in a Self-Directed IRA

Real estate investing is the most popular method savvy investors earn income on tangible assets, whether personally or in their IRAs. Those who have plenty of capital in their self-directed retirement plans can easily invest in residential, commercial, and other property such as land or vacation rentals. But, if you’re account isn’t flush with adequate funding for large acquisitions, have no fear. Tax lien investments in a self-directed IRA are options you can buy limited funds.

Even sophisticated investors use tax liens to help build growth in their IRAs.

Tax Liens Add Diversity to Your Portfolio

And even when the stock market is at peak performance, portfolio diversity is critical to maintain a healthy balance. Alternative assets like tax lien investments are an easy way to diversify and help protect your hard-earned retirement savings when the stock market isn’t so peaky.

The process is not hard. With a little knowledge and research, you can start investing with limited funds and earn tax-sheltered returns in your account. You know what that means? You’ll start building capital in your retirement plan that can help you acquire more lucrative real estate assets in the future.

Now that we’ve got your attention, we’re going to tell you how it’s done.

The 5 Steps of Tax Liens Investments in a Self-Directed IRA

  1. Property tax bills are due by property owners every year. When these bills are not paid, the governing municipality sells the unpaid property tax bill through an auction process. (After all, our cities and states have their own bills to pay, and these taxes are a large part of the income they depend on to meet those obligations.)
  2. The auctions are transactions where property tax liens are sold to investors (or for the purpose of this article—your IRA).
    • Offer the most cash: Then, the investor takes ownership of the lien and arranges repayment with the homeowner and can set a new interest rate and terms of repayment.Depending on the auctioning state’s process and rules you can acquire the tax lien in one of two ways:
    • Offer the lowest interest rate: Here, the interest rates are attached to the tax bill and continue to build up over the term of the lien (typically 24 months). The municipality continues the billing and collection process here on the investor’s behalf.
  3. In either scenario, your IRA becomes the lien holder.
  4. Income in your IRA is earned in two ways:
    • on the interest accrued until the lien is paid in full, or
    • in case of default, your IRA takes ownership of the property and can sell it to recoup the investment on the lien, and can earn additional income gained upon the sale of the property.

Everyone Benefits from Tax Lien Investments

    • You can build tax-free or tax-deferred income for retirement and grow more capital in your account to reinvest.
    • The homeowner is given a longer grace period to pay the bill.
    • The city/state has the money to conduct business and serve citizens without interruption due to lack of funds.

Steps to Perform Critical Due Diligence

Investors consider tax lien assets as a relatively low risk, but you should still perform due diligence.

  1. Research potential property before the auction.

If the homeowner defaults, you/your IRA can take the deed to the property. Depending on the condition of the property, you run the risk of having to pour more funds into it to make an attractive and profitable sale. Since your IRA owns the investment, all expenses must be paid with IRA funds. So, you must make sure your account has enough money to spare for these expenses, if necessary.

With that said, it’s important to research counties and neighborhoods you’re willing to own property in and drive by properties going up for auction. You won’t be able to inspect the inside or even get an appraisal, but driving by shouldn’t be an issue in most cases. Doing so can help mitigate a certain amount of risk if you do end up owning the deed—you can eliminate undesirable properties from your list.

  1. Tax lien investing laws differ from state-to-state and from county-to-county.

It is super-critical to understand and follow the rules and guidelines of municipalities that govern your tax lien property. It’s also important to understand the auction process to make sure you comply with regulations when bidding on properties.

Want to Learn More?

If you have questions about tax lien investments in a self-directed IRA, schedule a free consultation with Advanta IRA today. We are happy to answer questions you may have pertaining to self-directed retirement accounts and the investments these accounts can use to build tax-sheltered wealth for your future.

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About Scott Maurer

Scott is an attorney and a graduate of the University of Florida Law School. Scott started his career with Advanta IRA in 2006. His experience with various investment types and their unique processes makes him an invaluable asset. Scott holds the designation of Certified IRA Services Professional (CISP) and leads engaging seminars and webinars that educate the public on the intricacies of self-directed IRAs.