What is a Tax Lien Certificate?

A tax lien certificate is written proof that a taxing authority has placed a lien on a piece of property for unpaid property taxes.

How Does a Tax Lien Certificate Work?

Let's assume that John owns a house in the country and the annual property taxes are $4,000. John has fallen on hard times, and he's been unable to pay his property taxes. Accordingly, the county files a lien on his property for the unpaid taxes. The lien is represented by a tax lien certificate.

When a tax lien is placed on a property, the property owner cannot sell or transfer the property until the taxes are paid. And if the taxes are outstanding long enough, the taxing authority can even seize the property via a tax lien foreclosure and sell it to recover the unpaid taxes.

Why Does a Tax Lien Certificate Matter?

Taxing authorities are always anxious to get their money. That's why they're often willing to sell tax lien certificates (sometimes called tax deeds) to other people. Essentially, an investor pays the taxes on behalf of the property owner. He does this by attending an auction of public tax liens, and if he is the winning bidder, he receives a tax lien certificate to show that he purchased the tax lien. The price of the tax lien usually equals the amount of the outstanding taxes as well as fees and court costs (and whatever it takes to become the highest bidder).

To remove the tax lien, the property owner has to pay what the investor paid for the tax lien certificate plus a set rate of interest (which is what make tax lien certificates an interesting investment vehicle). The property owner pays this amount to the taxing authority, which then transfers the money to the holder of the tax lien certificate. If the property owner never pays the taxes and the taxing authority forecloses on the property as a result, the owner of the tax lien certificate (the investor) becomes the owner of the property free and clear.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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