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 >>
  2. What are some of the arguments in favor of a value-added tax (VAT)?

    A value-added tax (VAT) offers several advantages over an income tax or traditional sales tax. It raises needed government ... Read Full Answer >>
  3. How is compound interest taxed?

    Compound interest is money that is earned and added to a principal balance and then earns additional interest. Adding interest ... Read Full Answer >>
  4. According to the law of supply and demand, what is the effect of an increase or decrease ...

    Standard economic analysis shows that taxes of any form, including income taxes, tend to cause deadweight loss in the market. ... Read Full Answer >>
  5. How does the Fair Accounting Standards Board (FASB) regulate deferred tax liabilities?

    The Financial Accounting Standards Board (FASB) requires that deferred tax liabilities be recognized whenever there is a ... Read Full Answer >>
  6. What cost basis reporting rules are set by the Internal Revenue Service (IRS)?

    In accounting and tax terms, cost basis refers to the price paid for an asset. It's an important calculation for all businesses ... 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. Retirement

    Some Tax Considerations For Your Retirement Income

    Even if you don’t plan to retire, it’s still a good idea to think ahead about where to live, your income and how it all interacts with Social Security.
  4. Taxes

    What is Withholding Tax?

    Withholding tax is the income tax federal and state governments require employers to withhold from employee paychecks.
  5. Taxes

    OK, So I'll Be Smarter Next Tax Time

    5 tax resolutions to start on right now for a smoother tax return next April 15.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.

You May Also Like

Hot Definitions
  1. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  3. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  4. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  5. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  6. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
Trading Center