What Is a Tax Lien Certificate? How They're Sold in Investing

What Is a Tax Lien Certificate?

A tax lien certificate is a certificate of claim against a property that has a lien placed upon it as a result of unpaid property taxes. Tax lien certificates are generally sold to investors through an auction process.

Breaking Down Tax Lien Certificate

A tax lien certificate is a lien placed on your property for not paying your taxes. Every time your property taxes come due, the municipality will issue a tax lien. When you pay your taxes on time, the lien is removed. If you don't pay your taxes—or don't pay them on time—the town or county will auction off the tax lien certificate to an investor(s). That investor will then pay the taxes on behalf of the property tax owner. 

How Tax Lien Certificates are Sold

The county or municipality of the property's location usually conducts tax lien sales auctions. For a property to be eligible, it must be considered tax-defaulted for a minimum period depending on local regulation. Instead of bidding on an amount for the property, the interested parties bid on the interest rate they are willing to receive. The investor who bids the lowest rate wins the auction and is issued the tax lien certificate.

Once You've Bought a Tax Lien Certificate

After an investor places a winning bid for a specific tax lien certificate, a lien is placed on the property, and a certificate is issued to the investor detailing the outstanding taxes and penalties on the property. Not all states, counties or municipalities offer tax liens. Some states, such as California, only perform tax sales on a defaulted property, resulting in the winning bidder becoming the legal owner of the property in question.

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

Rate of Return on Tax Lien Certificates

Spurred by 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. Tax liens generally have precedence over other liens, such as mortgages. If the property owner fails to pay the back taxes, the investor could potentially acquire the property for pennies on the dollar. Acquiring a property in that manner is a rare occurrence since most tax liens are redeemed well before the property goes to foreclosure.

Associated Benefits and Risks of Tax Lien Certificates

Buying a tax lien certificate can, at times, prove to be an attractive investment. Some of the certificates have a low entry point, meaning you can buy some of them for a few hundred dollars. Compare that to a traditional investment like a mutual fund, which often comes with a minimum investment requirement. You also have the option to spread your money around so that you can buy multiple certificates for a low dollar value. And finally, the rate of return (as we mentioned above) is usually pretty consistent, so you're not going to have to worry about the ups and downs of the market. 

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, 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 an appropriate assessed value.

An example regarding the need for due diligence when researching tax lien certificates is a two-acre lot that may initially seem to be a good value, but it's actually a strip of land that is only 3 feet wide by 5 miles long. This renders the land unusable for many endeavors, such as building a home or a business.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Internal Revenue Service. "Publication 594: The IRS Collection Process," Page 5. Accessed Aug. 17, 2021.

  2. State of California. "Public Auctions and Bidder Information." Accessed Aug. 17, 2021.