Tax Lien Certificate

What is a 'Tax Lien Certificate'

A tax lien certificate is a certificate of claim against property that has a lien placed upon it as a result of unpaid property taxes. Tax lien certificates are generally sold to investors by most counties and municipalities in the United States through an auction process. Subsequent to a winning bid made by an investor for a specific tax lien certificate, a lien is placed on the property and a certificate issued to the investor detailing the outstanding taxes and penalties on the property.

The tax lien certificate therefore enables the investor to collect unpaid taxes plus the prevailing rate of interest applicable to such certificates, which can range from 8 to more than 30%, depending on the jurisdiction. The term of tax lien certificates typically ranges from one to three years.

BREAKING DOWN 'Tax Lien Certificate'

Thanks to the high state-mandated rates of interest, tax lien certificates may offer rates of return that are substantially higher than those offered by other investments. As well, since tax liens generally have precedence over other liens such as mortgages, should the property owner fail to pay the back taxes, the investor could potentially acquire the property for pennies on the dollar. However, this is a rare occurrence, since the vast majority of tax liens are redeemed well before the property goes to foreclosure.

Negative aspects of tax lien certificates include the requirement for the investor to pay for the tax lien certificate in full within a very short period of time, usually one to three days. These certificates are also highly illiquid, since there is no secondary trading market for them. Investors in tax lien certificates also have to undertake significant "due diligence" and research to ensure that the underlying properties have value and are not worthless.

RELATED TERMS
  1. Tax Lien Foreclosure

    The sale of a property resulting from the property owner's failure ...
  2. Federal Tax Lien

    A federally authorized lien against any and all assets of a taxpayer ...
  3. Voluntary Lien

    A claim that one person has over the property of another as security ...
  4. Possessory Lien

    Property that is in the hands of, or is possessed by, the individual ...
  5. Home Lien

    A legal claim placed on a home that makes selling the home, obtaining ...
  6. Mechanic's Lien

    A guarantee of payment to builders, contracters and construction ...
Related Articles
  1. Investing Basics

    Investing In Property Tax Liens

    Property tax liens can be a viable investment alternative for experienced investors that are familiar with the real estate market.
  2. Economics

    How Does a Lien Work?

    A lien gives a creditor the legal right to seize and sell property, then use the proceeds to pay off a borrower’s debt.
  3. Financial Advisors

    Top Alternatives Assets for Capital Preservation

    At best, alternative investments can help preserve capital by avoiding correlation with stocks and by beating inflation. Here's a look at some options.
  4. Taxes

    The 7 Best States For Property Taxes, and Why

    Understand why some states have high property taxes while others have low property taxes. Learn about the states with the lowest property taxes.
  5. Forex

    Life Beyond the Major Currencies

    Renowned currency expert Kathy Lien looks at other world currencies and their nation's economies to demonstrate that there are opportunities in forex outside of the US dollar.
  6. Forex

    How To Profit From News About China

    Renowned currency analyst Kathy Lien notes that as the US heads into midterm elections, politicians often focus on China, and she thinks the Chinese yuan will be active this fall.
  7. Taxes

    4 Little-Known Ways to Reduce Your Property Taxes

    Property taxes are often expensive and most don't know they can be appealed. Here are little known ways you can try to reduce your property tax liability.
  8. Forex

    How To Profit From Yen Intervention

    Kathy Lien, director of currency research for GFT, discusses the recent intervention by the Bank of Japan to support the yen and how traders can potentially profit from it.
  9. Home & Auto

    Equity Stripping Leaves Creditors Empty-Handed

    Add additional debt to your real estate assets to keep the creditors at bay.
  10. Taxes

    Getting U.S. Tax Deductions On Foreign Real Estate

    If your home or second home is not in the United States, you can still get U.S. tax deductions. How many and what kind depends on whether you also rent it.
RELATED FAQS
  1. How can I invest in tax liens?

    Find out about the steps an investor must take to invest in tax liens, along with the potential benefits of doing so. Read Answer >>
  2. How do I avoid a tax lien on my property?

    Find out the best way to prevent the government from placing a lien on your property, including the consequences of having ... Read Answer >>
  3. What types of liens are seen as good and which are bad for my credit?

    Understand what a lien is and what types of liens are most common for individuals, and learn which types of liens are good ... Read Answer >>
  4. What is the difference between a possessory and a non-possessory lien?

    Gain a basic understanding of a possessory lien and a non-possessory lien, the key differences between the two structures ... Read Answer >>
  5. Can credit card creditors put a lien in house property?

  6. How do you get a hard copy of a stock certificate?

    Before online brokers and personally-directed accounts, holding a physical stock certificate was a necessity, as this was ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center