Seize Tax Liens' Abundant Opportunities

Physician's Money Digest, August31 2003, Volume 10, Issue 16

When a property owner is delinquenton their real estate taxes,the local government steps in and auctionsoff the overdue taxes. The overduetaxes are sold as tax lien certificates,which can be purchased by anyone. Eachtax lien certificate is purchased for theoriginal delinquent back tax amount,which is normally 1% of the marketvalue of the property that secures thetax lien. The investor, in turn, receivesthis money back with interest.


The investor who purchases tax liencertificates typically earns 8% to 25%interest—the interest rate is determinedat the auction and depends on wherethe liens are purchased. If the lien is paidoff, the investor receives their principalplus interest. If the property owner failsto pay off the lien, however, the investorreceives the property free and clear of allother liens. You may not be aware of it,but tax liens can be used as an effectivestrategy in decreasing your tax burden.


You can use your traditional IRA andtransfer it to a trust custodian who willallow self-directed investments and willhold tax lien certificates. Once the custodianhas the IRA funds, immediately convert$1000 of the IRA funds into a RothIRA (you pay income tax on $1000 x 32%tax rate = $320). Now you have startedthe 5-year holding requirement for taxfreewithdrawals.

The next step is to purchase $1000 intax liens from your Roth IRA and thenuse any additional funds that you wouldlike for this investment vehicle from yourtraditional IRA account (in this example,let's say $20,000). When purchasing thetax liens, it is most effective to targetliens that are the least likely to be paidoff, thus leaving you with the property.Knowledgeable real estate attorneysshould be able to help you.


Finally, the tax liens that are notredeemed should be converted intoyour traditional IRA, at their originalcost. Then convert the liens again, incorporatingthem into your Roth IRA. Yes,you will pay tax on those convertedamounts, but most likely at only the32% tax rate, and only on the originalcost of the original tax liens.

Using the same scenario, if 20% of theliens are not redeemed, out of your original$21,000 investment in tax liens, youwill have $4000 in your final Rothaccount ($20,000 x 20% = $4000), plusyour original $1000 Roth. This gives agrand total of about $5000 in unredeemedtax liens in your Roth IRA thatwould mature into property deeds.Using the 1% rule, your $5000 in unredeemedtax liens would control propertyworth $500,000, completely tax-free.

Ned Majors is an attorney whospecializes in tax lien certifi-cates. He is the president of TaxLien Agents, a Myrtle Beach,SC, company that representsclients at tax lien auctions astheir individually contracted purchasing agent.He welcomes questions or comments at 843-293-6307, or visit