Property Acquisition Investment for tax lien: what to look for

When looking for a property which has a lien you want one that is likely to be allowed to go for foreclosure. So look for the following:

Properties that have been abandoned by the owner or its owned by someone who is living out of the country. 

Properties that has several years of unpaid taxes (more than 5) and the ownership is free and clear of other liens. 

Properties where the owner has passed away, has file for  bankruptcy  or the owner is a minor or active member of the military  are more difficult to foreclose.

This information its not hard to find and  could avoid you a lot of headaches. The owner of a property its public information and you can find it by searching in the country assessor's office. You could also go to the county recorder and find out if the owner has file for bankruptcy

Criteria when considering a property acquisition investment strategy on tax lien

You have to consider the following points:

1. Chances of the owner paying the lien
2. How long you are happy to wait to forclourse the property
3. Other property taxes that will have to be pay in the future
4. How likely are you to foreclose the property
5. Does the property stand in a good area with potential growth? 
6. Does the property need repairing?
7. How much is the property worth.

Criteria for interest rate investment strategy on tax lien

You have to consider the following points:

• What would be the rate of return
• what is the level of risk you would be happy with
• How much money are you planning to risk
• Time you are happy to hold the lien for

Different strategies for Tax lien

There are 2 tax lien strategy. You could decide you are happy earning interest at a stated rate or if the lien never gets paid by the home owner then you can foreclose the property. It is important to decide which of this options you want to go for as you will have to proceed in different ways. 

Say for instance you will be happy with accruing interest. This is a great investment for a short or mid term when your main goal is to get cash flow and you have cash sitting around waiting to do some other investment. 

If you would like to go for the property you have to consider that this is going to be a long term investment, you would have to consider that the property will need to be foreclose and  check out the area as it could be in a zone with good appreciation potential and its depreciation and leverage potential.

Tax Lien Investment strategy

Here is a summary of how a tax lien occurs:

1. 1. A landlord does not pay taxes due on the property
2. The government puts a non consensual lien (which is a form of security interest granted to secure the payment of a debt) over the property for back taxes
3.  This lien is offered for sale at an auction or at a fixed interest rate 
4. If the lien is sold at an auction there could be multiple investors bidding on the interest rate of this lien
5. The interest will be accrued until the landlord or any other lien holder pays the back taxes. 
6. If the lien is not paid then the investor who purchased the lien can foreclose against the property and therefore own the property for the price of the back taxes. 

1031 Exchange: how does it work

The government wants to incentive the type of real estate investment in the long term. That is why it has created some of the tax benefits that you can profit from.
One of them is that you are allowed to write off the cost of the property over some time thought annual depredation deductions and this could be use to offset other income that you have earned.
When its time to sell your property the best way to make the most of the tax benefit its to profit from the 1031 exchange. When you sell your property and buy a new investment property you can roll the gain from the previous property to the new one without paying the tax until some time in the future. Note that all exchange have to be like kind. For instance it wont be the same if you are selling a property in the US and buying another overseas. The IRS must approve to do this exchange.
The property has to be hold for one year or more and be for investment purposes in order to be eligible to use the 1031 exchange.
There is also the rule of 45 days identification period in which (from the sale of the old property) you have to come up with a list of properties you are interested in buying and replace the property within 180 days. Although this might be quite challenging the IRS doesn't accept any extensions.
Other rules include to use a qualified intermediary and follow the title holding requirements as well as buy a property or real estate of equal or higher value and reinvest all cash.

Property types and how are they taxed

There are 4 types of property types:

1. Property development - is taxed as ordinary income
2. Short term property (fix and flip) - is taxed as short term capital gains
3. Personal Residence - it could qualify for a gain exclusion depending on the marital status
4. Investment property -  you can profit from some tax benefits.