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

Real estate investing is by far the most popular method savvy investors use to earn income, whether personally or in their IRAs. Those who have plenty of capital in their self-directed 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 is an option you can take advantage of with limited funds.

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

But, these assets are a fine example of how you can invest in real estate options in your IRA with little capital—and capture the potential returns that help grow wealth for your retirement.

Tax Liens Add Diversity to Your Portfolio

Even when the stock market is at peak performance, diversity in your portfolio 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 that can produce 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 Process 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 (you and me, or for the purpose of this article—your IRA!).
  3. Depending on the auctioning state’s process and rules:
    • The winner is one who offers the most cash to take ownership of the lien and arranges repayment with the homeowner to set a new interest rate and terms of repayment.
    • The lien is awarded the to the investor willing to accept the lowest interest rate over the term of the lien. 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.
  4. In either scenario, your IRA becomes the lienholder.
  5. Income 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 earns additional income gained upon the sale of the property

Everyone Benefits from Tax Lien Investments

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

While many investors consider tax lien investments a relatively low risk, you should still perform due diligence.

If the homeowner does default, you don’t want to be stuck with a piece of unsellable property in your IRA. Depending on the condition of the property, you run the risk of having to pour more income into it to make an attractive and profitable sale. Often, in the case of tax lien auctions, you may not be able to visit the property or even perform a survey.

With this in mind, understand that any and all expenses incurred by your investment (such as repairs or renovations) must be paid out of your IRA funds. If you have a small IRA, this could be a killer. But, if you budget your investment process with this in mind and scope out the property and its potential before investing, you’ll be prepared and still come out a winner!

If you have questions about tax lien investments in a self-directed IRA, don’t forget to schedule your free consultation. We are happy to answer questions you may have pertaining to self-directed retirement accounts and the rules that govern them. If you are ready to get started, we’re ready to assist you!   

About Jack Callahan

Jack proudly earned his bachelor’s degree in finance and multinational business from Florida State University and his law degree from the University of Florida College of Law. He established Advanta IRA in 2003 and has steadily nurtured and grown the company and the team every year since. Prior to founding Advanta IRA, Jack delivered specialized counsel to real estate investors, small business owners, and real estate professionals on tax, legal and financial matters. As an industry expert, Jack is a frequent speaker on self-directed retirement plans. He is an accredited continuing education instructor for the Florida and Georgia Bar Associations, Florida and Georgia Real Estate Commissions, and The American Institute of Certified Public Accountants.