Tax Liens: Understanding This Financial Tool

What are Tax Liens?

When a property owner fails to pay their property taxes, the government can place a lien on the property. A tax lien is essentially a legal claim on a property and is used as a way to collect past-due property taxes owed to a government entity, such as a city or county. Once a tax lien is placed on a property, the original property owner has a certain amount of time to pay off the outstanding balance to avoid the property being auctioned off to pay the debt owed.

How Do Tax Liens Work?

When a government agency places a tax lien on a property, that lien becomes a public record that can be found through a title search by any interested party. The lien holder can either sell this lien to an interested buyer or hold it themselves. Tax liens typically have a high interest rate, which makes them attractive to investors. The property owner has a certain amount of time, known as a redemption period, to pay off the debt and interest in order to remove the tax lien. If they do not pay within that time frame, the property can be auctioned off.

Benefits of Investing in Tax Liens

There are several benefits to investing in tax liens. One of the main benefits is the high interest rate which can range from 6% to 36%. Additionally, tax liens are backed by the property, which means that investors have a legal claim on the property in the event that the property owner is unable to pay off the lien. This makes investing in tax liens a relatively secure way to earn a return on investment.

Risks of Investing in Tax Liens

As with any investment, there are risks involved in investing in tax liens. One of the biggest risks is that the property owner will pay off the lien within the redemption period, preventing the investor from earning the promised return on investment. Additionally, the auction process can be highly competitive, which can drive up prices and result in lower than expected returns on investment. Investors should also be aware that some properties may have structural or legal issues that can make them difficult to sell, which can result in financial losses.

How to Invest in Tax Liens

Investing in tax liens is typically done through an online auction or through tax lien certificate sales hosted by the local government agency. Each state has different laws regarding how tax liens are auctioned off, so it’s important to do your research and understand the process before investing your money. Additionally, investors should consult with an experienced tax professional to ensure that they are aware of any tax implications associated with investing in tax liens.


Tax liens can be a valuable financial tool for both property owners and investors. For property owners, it’s important to stay up to date on property taxes to avoid having a tax lien placed on the property. For investors, tax liens can be a lucrative way to earn a return on investment backed by a legal claim on a property. As with any investment, it’s important to understand the risks and do your research before investing your money. Looking to deepen your knowledge of the topic? High Yield Returns, packed with valuable and additional information that will enhance your understanding of the topic discussed.

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