Tax Lien Certificate

AAA

DEFINITION of 'Tax Lien Certificate'

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.

INVESTOPEDIA EXPLAINS '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. Silent Automatic Lien

    A lien that does not appear in any public record. This is a method ...
  2. Lien

    The legal right of a creditor to sell the collateral property ...
  3. Tax Lien

    A legal claim by a government entity against a noncompliant taxpayer's ...
  4. Default Risk

    The event in which companies or individuals will be unable to ...
  5. Blanket Lien

    A lien that gives the right to seize, in the event of nonpayment, ...
  6. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
RELATED FAQS
  1. Are my IRAs secure against possible liens?

    Your IRA is protected from bankruptcy up to $1 million. However, in all other cases, state law determines whether any protection ... Read Full Answer >>
Related Articles
  1. Retirement

    Holding Titles On Real Property

    Find out how best to claim and convey ownership on your assets.
  2. Home & Auto

    Encumbrances And Nonpossessory Interests In Real Property

    Learn about nonpossessory interests and the various forms of encumbrances.
  3. Taxes

    What To Do If You Lost Your W-2

    There's no need to panic if you don't have your Form W-2 to file taxes, there are easy ways to gain access to the missing form or file without it.
  4. Taxes

    Will Itemized Deductions Get You A Bigger Refund?

    April and taxes are due soon. If you need to file your return, you might have to decide if itemizing your deductions this year will net you a better deal.
  5. Credit & Loans

    6 Ways To Build Credit Without A Credit Card

    It's definitely possible – if a bit more complicated – to build a credit history without traditional credit cards. Just follow these steps.
  6. Taxes

    The First Thing You Should Do With Your Tax Refund

    Nobody likes to pay taxes, but everyone loves to get a tax refund. When the check arrives in the mail, it's hard to resist spending it on some indulgence.
  7. Taxes

    How Does An IRS Audit Work?

    It doesn't automatically mean an IRS agent will be ringing your doorbell. Here are the different types of IRS audits and how to handle them.
  8. Taxes

    What is the Effective Tax Rate?

    The effective tax rate is the average rate at which an individual or corporation is taxed per year.
  9. Taxes

    Made A Mistake On Your Tax Return? Don't Panic

    You can always file an amended return. But the sooner you do it, the better.
  10. Taxes

    Business Taxes: Not Paying More Than You Have To

    If you're a small business owner, note these potential tax deductibles so that you don't pay taxes that could have been extra revenue in your account.

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center