Investing in Tax Liens

Tax liens established by governments for non-payment of taxes as opposed to simple liens that can be the result of defaulting on loans. The government can sell tax liens to private citizens and companies who then become the owners of the debt and are entitled to full payment of the principal and interest. Tax liens vary in risk but are considered to be higher risk because default is common and the tax lien is not necessarily attached to property.

Before you invest in tax liens, you need to evaluate each investment on an individual basis. If the default risk is low and there is sufficient collateral, or favorable terms, tax lien investments can be very fulfilling. Many people have made riches investing in tax liens and others have been far less fortunate so you should hold possible tax lien investments to an even higher standard.

Because of the inherent risks involved with tax lien investing, most major IRA custodians simply do not allow such investments. To take advantage of the increased rewards of tax lien investing within the confines of an IRA, you will probably need to open a self-directed IRA that will allow you to invest when you please and how you please. The favorite instrument for such an account is the Limited Liability Company.

The Limited Liability Company and the IRA
By forming an LLC within your IRA, you can gain checkbook control over your IRA. Because you don’t have to ask your custodian’s consent to invest nor pay transaction fees for every expense paid from the IRA you have the freedom to invest in tax liens (and numerous other investments not allowed in traditional IRAs).