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. Lien

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

    A federally authorized lien against any and all assets of a taxpayer ...
  4. Tax Lien

    A legal claim by a government entity against a noncompliant taxpayer's ...
  5. Silent Automatic Lien

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

    A claim that one person has over the property of another as security ...
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. Professionals

    Introduction

    FINRA/NASAA Series 66 - Regulation of Securities. This section gives all the definitions of security under the Uniform Securities Act (USA).
  6. Home & Auto

    Tip No.5: Make Sure You Have Clear Title

    Liens and encumbrances on a property can leave you stuck with the past owner's liabilities.
  7. 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.
  8. Forex

    One Nation's Debt Is Another's Trade Set-Up

    Though economists may view sovereign debt in terms of numbers, Kathy Lien says it's also a sentiment gauge, and successful recent debt auctions have kept euro traders bullish.
  9. Retirement

    Index-Linked Certificates Of Deposit: Upside Potential, Low Risk

    Index-linked CDs generate returns similar to indexes, without the potential for loss.
  10. Home & Auto

    Encumbrances And Nonpossessory Interests In Real Property

    Learn about nonpossessory interests and the various forms of encumbrances.
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. Does the IRS report to credit bureaus?

    Understand the relationship between the IRS and the various major credit bureaus. Learn how credit bureaus find out about ... Read Answer >>
  5. What is the difference between a lien and an encumbrance?

    Understand the legal terms ''lien'' and ''encumbrance,'' and learn the significant distinction between these two essential ... Read Answer >>
  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. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center