Top IRA Real Estate Investment Strategies for Massive Wealth

Can you use your IRA to buy real estate? It’s a question worth asking as you eye up different investment strategies for retirement. 

To answer the question, not only can you invest in real estate with an IRA, but it could provide massive tax benefits that help compound gains in your portfolio. 

To get started, you’ll need to open a self-directed IRA, which is an IRA that allows for alternative investments. Self-directed IRAs can be structured like a Roth or traditional IRA, allowing you to compound those earnings tax-free until withdrawal–if you choose. 

However, there are several self-directed IRA rules limiting what you can purchase. Nevertheless, many investors still have lots of freedom to invest in multiple types of real estate that go beyond the restrictions imposed by traditional IRA custodians.

To help you get started with your real estate IRA investments, I’ve outlined a few ways to purchase real estate using your IRA. 

Five Strategies to Purchase Real Estate With an IRA

 1. Directed Purchase

The simplest way to purchase real estate is by using cash in your SDIRA account. If your account holds sufficient funds, you can purchase a property directly. Otherwise, you will need to pursue other options. 

Like a 1031 exchange, a direct purchase with an SDIRA is one of many tax-free investments you can use to build massive wealth. 

2. Start an LLC

Opening an LLC allows you to acquire complete checkbook control over your SDIRA funds to purchase and move real estate. Unlike direct purchases, which require custodial support, opening an LLC allows you to access funds directly without the support of your custodian, so you gain full control over your investment funds. 

To open an LLC, you’ll need to register it with all of the standard agencies required for incorporation in your state. A passive custodian is then used to transfer funds from the IRA owner to a new IRA LLC bank account.

Once opened, the LLC owner can exercise checkbook control over any investment they want. 

Additionally, LLCs offer investors additional tax incentives by helping them avoid direct federal taxes, so they are taxed at a lower rate. 

3. Partner Your IRA

Only some people seeking to generate wealth through IRA real estate investments have the cash available to purchase a property. Additionally, it can be difficult to raise capital for real estate

Fortunately, you can use your self-directed IRA to partner with additional investors to purchase a property. 

While we often call this partnering your IRA, the official term for this strategy is "purchasing an undivided interest" in a property. Once you've combined your self-directed IRA funds with partner funds, your IRA owns a percentage of the property that's proportionate to your funding contribution. 

In addition, your IRA is responsible for its portion of all property expenses. That same portion applies when proceeds are divided following the sale of the investment.

This approach is a great way to dip your toes in the real estate pool without taking on too much debt or risk. 

4. Invest in Mortgage Notes

What if you want to avoid using your IRA funds to manage a property you own physically? 

Fortunately, mortgage notes offer a passive alternative to traditional real estate investment. 

A mortgage note is a vehicle used to extend credit. Notes are used to back a loan and noteholders by charging interest. 

Portions of mortgages can also be purchased and sold through IRAs. Under this setup, your retirement account will hold an undivided interest in the portion of the note owned as a way to generate income.

5. Use Your IRA for a Non-recourse Loan

A non-recourse loan is another option for someone lacking the full funds to invest in real estate. This type of loan is secured in the name of your IRA using the property being purchased as collateral. 

Unlike personal loans, the IRA holder's personal assets are used as collateral. So a lender can only legally seize the IRA asset being financed.

Alternative Ways to Invest in Real Estate With Retirement Funds

If these traditional strategies require too much upfront capital or don’t suit your interests, there are several additional ways to leverage an IRA to invest in real estate. 

1. Become a Home Wholesaler

It's possible to use self-directed funds to put properties under contract from distressed sellers using your IRA. When you resell the contract as a wholesaler, the money from the buyer can be transferred directly to your IRA at closing. 

When done properly, a down payment ranging from just $100 to $1,000 can easily become $10,000.

2. Purchase Tax Liens

IRAs can be used to invest in tax liens that combine low capital, little responsibility for the investor, and generous returns. Tax liens are imposed on properties for delinquent taxes. 

When investors purchase liens from counties, they will make money in one of two ways. In the first case, the investor earns interest when a lien is redeemed. Secondly, if the taxes are never paid, the deed to the property is given to the investor.

3. Invest in REITs

Many people are surprised to learn that a REIT (real estate investment trust) is one of the investments permitted with a standard Roth IRA. REITs are publicly traded companies that own and manage income-producing properties on behalf of investors. The list of property types commonly offered through REITs includes:

  • Homes.
  • Apartment complexes.
  • Offices.
  • Warehouses.
  • Retail centers.
  • Medical offices.
  • Storage complexes.
  • Data centers.
  • Hotels.
  • Cell towers.

Investors favor REITs for their ability to pay out consistent dividends. In fact, IRS regulations dictate that REITs must pay out 90% or more of taxable profits to shareholders. While REIT dividends paid out to individuals are taxed as ordinary income, dividends paid out to IRAs enjoy tax benefits.

4. Form a Joint Venture With a Contractor

Self-directed IRAs can be used to invest in joint ventures. When designing a real estate joint venture, you can enter into an agreement with a contractor to pool resources to build or rehab properties. 

What makes a joint venture different from a partnership is that a joint venture is only intended to operate for a specific period. It's understood that both parties intend to sell for profit within that time frame, making them easy to enter and leave.

5. Bird Dog With an Experienced Broker

If your goal is to purchase a property through your IRA, there's no doubt that coming up with full funding using your IRA alone is a challenge. This is why many IRA-minded property investors like the "bird dog" technique, using brokers to help them find distressed, underpriced properties. 

While the broker takes a fee in exchange for leads, investors often find this the best way to scoop up bottom-of-the-barrel properties that can be turned into gems.

6. Purchase Options and Flip Raw Land, Farms, Vacant Lots, and Storage Units

IRAs can absolutely be used to fund "flip homes." Using a self-directed IRA, you can purchase homes in need of repairs for the purpose of either generating rental revenue or selling. 

However, it's important to be aware that the IRS has some pretty strict rules in place regarding who can perform work on an "IRA flip" property due to the disqualified person rule.

7. Sell Options on Existing Homes in Your IRA

Once you've added a property to your IRA, you can capitalize on that property by selling real estate options. Many investors are attracted to real estate options today because traditional real estate investment channels have become "crowded." 

With a real estate option, you're creating a contract that allows the buyer to purchase your property at a set price within a specific period of time in exchange for an option premium. If the buyer declines the purchase at the end of the contract period, you can move forward with another buyer with your premium in tow.

Using an IRA to invest in real estate is a great strategy for staying partially insulated against the stock market. Using the strategies above, investors can combine the tax benefits of IRAs with the growth of real estate to build massive wealth.

11 Best Tax-Free Investments to Build Wealth

Few people build wealth on salary alone. Instead, investments compound earnings by putting money to work passively. 

However, it's important to remember that how much you keep is more important than how much you make. Risk and taxes are the two causes of investment losses, but there’s no safer investment than a tax-free investment.  

Allowing your portfolio to grow tax-free removes the stress of moving your money around through 1031 or tax havens. Plus, you have a better chance of beating out inflation without the added burden of taxes. 

So whether you’re self-employed or a salaried individual looking to build wealth for retirement, here are 11 tax-advantageous investments for building wealth. 

1. 401(k)

The best way to tap into tax-free assets is to open up a retirement account. With a traditional employer-sponsored 401(k), employee contributions enjoy tax-free growth while reducing taxable income by transferring earnings out of each paycheck. 

As a result, you can contribute money to your 401(k) without having it taxed while also reducing the amount of taxable income from your regular salary. The only kicker is you’ll eventually pay taxes when you withdraw your funds at retirement.

An individual 401 (k) provides the same tax benefits as an employer-sponsored plan for self-employed people and small-business owners. 

While a 401 (k) is primarily used for investing in mutual funds, it can also be used for index funds, large-cap funds, small-cap funds, foreign funds, bond futures, and real estate funds.

2. IRA: Traditional, Roth, and Self-Directed

IRAs are another popular retirement account used to grow your wealth tax-free. 

There are a few different types of IRAs, including:

  • Traditional IRAs: Individuals contribute pre-taxed money to their accounts and are taxed at the time of withdrawal. 
  • Roth IRAs: Individuals contribute already taxed earnings and can withdraw their funds tax-free at retirement.
  • Self-Directed IRA: These retirement accounts allow people to invest in alternative assets, like crypto, gold, LLCs, or real estate, using a traditional or Roth structured account. 
  • SEP IRA: The Simplified Employee Pension IRA allows employers to contribute to their employee’s traditional IRA accounts. 
  • SIMPLE IRA: The Savings Incentive Match Plan for Employees allows employers to match contributions to an employee’s IRA. 

All IRA accounts are fine options for retirement, with the major difference being whether or not you think you’ll be in a higher tax bracket at retirement. If so, a Roth IRA may be right for you.

Additionally, all IRAs limit your investment options to standard stock market assets, such as stocks, bonds, ETFs, and CDs, with the exception of an SDIRA. 

3. 1031 Exchange

A 1031 exchange is an investing strategy that allows you to "swap" one investment property for another as a way to avoid short-term capital gains. Under normal circumstances, a person must own a home for one year before selling it if they want to avoid getting a hefty tax bill for income earned by selling real estate

The 1031 exchange allows you to avoid paying taxes at the rate of your ordinary income if you use the money earned from the sale to buy another property. 

4. Tax-loss Harvesting

Tax-loss harvesting works by selling an underperforming, money-losing investment to reduce taxable capital gains. For example, dumping an underperforming property can offset your ordinary taxable income to reduce your tax burden for the year. Once the property is off your roster, the money from the sale can be reinvested into a better investment option. 

5. Long-Term Capital Gains

Another way to lower your tax bracket is to hold an asset for more than a year to reduce your capital gains tax. When you hold on to a property or any asset for longer than a year, you'll pay long-term capital gains instead of short-term capital gains. While the short-term capital gains rate ranges from 0% to 37%, long-term capital gains are taxed at 0% to 20%.

6. Form an LLC

Forming an LLC allows you to avoid double taxation. An LLC is considered a pass-through entity by the IRS, which means LLC owners aren't on the hook for paying taxes on the corporate level. For example, many people form real estate LLCs to reduce their tax burden for any sale they make involving their investment properties. 

LLC owners can instead report their profit shares and losses on their personal tax returns, greatly lowering their taxable burden. 

7. HSA

Unlike a Flexible Spending Account (FSA), a Health Savings Account (HSA) doesn't require an employer sponsor. Your HSA will allow you to invest tax-deferred, tax-free earnings for eligible health spending. HSA funds can be rolled over yearly to ensure you don't lose the money you don't spend. The money can keep rolling all the way through to retirement to allow you to cover health services and products in your golden years.

8. Charity/Donations

Charitable donations can be tax-efficient investments. In addition to putting money toward a good cause, a charitable donation can reduce your adjusted gross income for the year. Everybody wins if the money you give to a good cause allows you to move into a lower tax bracket with a lower tax rate.

9. US Series 1 Savings Bond

A Series I bond is issued by the U.S. federal government with dual interest-earning potential that offers inflation protection. Every Series I bond earns both a fixed interest rate and a variable rate that changes with inflation. 

Series I bonds are never taxed at the state or local level. While federal taxes are based on the interest earned while an I bond is held, you can choose the method you want to use to pay your I bond taxes. The first option is only to pay tax on your Series I bond when it's sold back to the government one day. The second option is to pay the tax that is due on interest earned for the year that was added to your principal. 

10. 529 Education Fund

A 529 fund is a college savings plan sponsored by individual states. Money in an account can be used for school tuition, books, and other qualified expenses at most institutions. Contributions to a 529 account are counted as after-tax deductions. 

However, contributions can grow free of federal or state income taxes. Therefore, no income tax is paid when 529 funds are withdrawn for qualified expenses.

11. Municipal Bond

Finally, a municipal bond is issued by either a state or local government to fund investment projects in the community. When purchasing a municipal bond, you're effectively lending money to the bond issuer in exchange for interest payments. 

While short-term municipal bonds may mature in one to three years, long-term municipal bonds may mature 10 to 20 years in the future. Interest on municipal bonds is generally exempt from federal taxes. The bonds are also exempt from state and local taxes if you reside in the state where your bond is issued. 

Final Thoughts on Tax-Free Investment Strategies

We often focus on reducing risk when investing. However, a core principle of investing "for keeps" is to make choices that minimize taxes. The fun begins when you realize that this can be done using investments that involve everything from real estate to health savings accounts. 

Self-Directed IRA Rules, Assets, and Prohibited Transactions

Uncertain market conditions can make even the best investors question their retirement decisions. While there are many flashy investments for retirement planning, the best types of investments are proven ones. 

While a traditional IRA provides offers a proven portfolio of investments with steady long-term growth, sometimes investors want an extra cushion against inflation or something more stable. Unfortunately, traditional and Roth IRAs provide little investment opportunity when it comes to real estate, precious metals, or other investments that beat out inflation.

One retirement plan I recommend to all of my customers and readers is a self-directed IRA. Owning a self-directed IRA allows you to invest in alternative assets, such as cryptocurrency, real estate, and gold. But, most importantly, with the right self-directed IRA custodian, you will have free reign to choose which assets you want to invest with.

To learn more about self-directed IRAs, let’s explore all of the rules and regulations surrounding them. 

What is a Self-Directed IRA?

A self-directed individual retirement account (SDIRA) allows investors to invest in alternative investments for their retirement. And, unlike traditional or Roth IRAs, SDIRAs are usually offered through custodians instead of brokerage firms. 

While a self-directed IRA comes with the same IRA contribution limits and tax-advantage basis as both the traditional IRA and Roth IRA, it has different asset rules. We'll cover what these "alternative" assets encompass in a bit. But, first, take a look at the rules of operating a self-directed IRA. 

Self-Directed IRA Rules

Disqualified Persons

Transactions are tightly controlled with self-directed IRAs. While your IRA is intended to fund your lifestyle after retirement, it's not intended to start benefiting you before retirement. That's why any transaction that might be interpreted as "providing immediate financial gain" is prohibited. 

The disqualified-person rule doesn't just apply to the IRA holder; it can also include:

  • Your spouse.
  • Your children.
  • Your parents.
  • Your employer.
  • Any financial advisor, fiduciary, administrator, or custodian providing IRA-related services.
  • Any business entities you own at least 50% of on either a direct or indirect basis.
  • Any business entity that is influenced by a disqualified person.

The list of prohibited transactions includes:

  • Transferring IRA plan income to a disqualified person
  • Transferring plan assets to a disqualified person
  • Extending IRA credit to a disqualified person
  • Providing goods or services to a disqualified person. 

Things get murky when determining who counts as a disqualified person if you run lots of transactions using your self-directed IRA. One classic example of a violation would be hiring your own son or daughters to build a deck on a rental apartment that your self-directed IRA owns. Seeking legal guidance to separate disqualified persons from your self-directed IRA is advised.

Disallowable Assets

The restrictions on self-directed IRAs also don't stop at "who" can participate in plan-related transactions. The rules also restrict "which" assets you can invest in and, while there's no official list of approved investments for self-directed IRAs, the rules are pretty clear regarding what's prohibited. For example, here's a list of disallowable assets in an SDIRA:

  • Collectibles: This includes gemstones, art, coins, and other valuables with intrinsic, historic, or novelty value. However, some United States and foreign coins with 99.9% purity are allowable if the IRA custodian has physical possession of them.
  • Life Insurance: IRAs are prohibited from investing in whole life, universal, and term life insurance policies. If these investments are attractive, consider a 401(k) plan.
  • S-Corporations Stock: S-Corporation shareholder restrictions prevent them from allowing IRAs as shareholders.

Certain actions are also prohibited when you're handling assets that are allowed with a self-directed IRA. When operating a self-directed IRA, you are prohibited from borrowing money from the IRA, selling or leasing property to the IRA, or taking payment for managing a property held by the IRA. In addition, all income earned from an IRA must be returned to the IRA.

Personal Benefit

The personal benefit rule reiterates everything we discussed above. Essentially, an SDIRA cannot be used for personal gain that circumvents tax law. For example, no income derived from an SDIRA can be used for a personal savings or checking account. 


The tax-deferred benefit of a self-directed IRA means that you do not have to pay taxes on any interest and gains earned through your IRA until you withdraw funds. What's more, contributions made to any IRA can entitle the account holder to tax deductions. 

Unfortunately, violating any of the rules of the SDIRA will nullify your account’s tax advantage. In many cases, this could mean that your account will lose all tax benefits and pay full taxes on any contributions and withdrawals. 

Contribution Limits

Finally, it’s important to understand how much you can contribute to an SDIRA before signing up for one. The 2022 contribution limit for self-directed IRAs for people under age 50 is $6,000. The limit bumps up to $7,000 for people over age 50. This is a per-person limit instead of a per-account limit. 

Self-Directed IRA Alternative Assets

Now, that we have a good understanding of what’s allowed and not allowed in an SDIRA, let’s explore a list of assets you can invest in:

  • Cryptocurrency.
  • Crypto staking.
  • Real estate.
  • REITs.
  • Startup companies.
  • Crowdfunded assets.
  • Undeveloped/raw land.
  • Promissory notes.
  • Tax lien certificates.
  • Gold, silver, and other precious metals.
  • Water rights.
  • Mineral rights.
  • LLC membership interest.
  • Livestock.
  • Commodities.
  • Private stock.
  • Private equity.

Self-directed IRAs open doors to assets that are prohibited by most of the other retirement investment plan options. For example, the ability to raise capital for real estate using an SDIRA allows you to invest your retirement account in single-family homes, multi-family homes, commercial properties, mobile homes, and more. 

What's more, account holders have a unique opportunity to "invest with their conscience" by investing in socially responsible and sustainable investments that they pick by hand. 

Are There Any Cons to an SDIRA?

Like all IRAs, the self-directed IRA requires you to take required minimum distributions beginning at age 72 to avoid steep penalties. However, taking distributions with a self-directed IRA that is tied up with illiquid assets can sometimes prove to be more complex without professional assistance. 

In addition, self-directed IRAs tend to have a higher annual fee compared to other options, although this depends largely on the custodian.

Is a Self-Directed IRA Right for Me?

The big advantage of a self-directed IRA is the ability to access alternative assets with higher growth potential than standard IRA investments. For this reason, a self-directed IRA is attractive for anyone seeking to avoid the daily turmoil and volatility that comes with the stock market. 

One detail that often gets overlooked when discussing the diversification of self-directed IRAs is that account holders can also continue to invest in traditional investments that are permitted by other types of IRAs.

So even if you just want to extend your retirement portfolio to stocks and precious metals, an SDIRA helps you out. If you're looking for more investment advice, be sure to browse my site for educational resources. For those interested in opening an SDIRA, visit Horizon Trust to speak to a custodian about opening an account. Horizon Trust offers low fees, friendly service, a state-of-the-art investment dashboard, and easy guidance to help you open an account and invest in what you want quickly.

How to Form a Real Estate LLC: Benefits and Costs 

Is it a good idea to form a real estate limited liability company LLC after buying a property? 

After raising capital for real estate, it’s often recommended to protect your investment by forming a real estate limited liability company (LLC). 

A real estate LLC offers extraordinary benefits for a real estate business. But does that mean it’s the right choice for your setup? Here's what you need to know before you sign on the dotted line. 

Pros and Cons of a Real Estate LLC

The LLC structure is a natural fit for a property investor because it offers easy entry with plenty of room to grow without changing structures. Like any business structure, an LLC offers both benefits and drawbacks for real estate investors. 

Let's start with some of the pros and cons of forming an LLC for real estate. 

Real Estate LLC Pros:

  • Protection of Personal Assets: While a real estate investment that's a rental property can lead to tidy profits, being an investor also exposes your personal assets to risk unless you have liability protection. Forming an LLC limits exposure to personal lawsuits because it shifts legal responsibility from the investor to the real estate business.
  • Pass-Through Taxation: This is one of the biggest LLC advantages for business owners because it prevents double taxation. In addition to offering protection against personal legal liability, LLCs also offer protection against double taxation by exempting businesses from paying taxes as "entities." Instead, income is passed to business owners in the form of personal income tax based on their share of the business.
  • Easy Management: Unlike corporations, LLCs can be managed by either third-party operators or direct owners. Officers and directors are not required.
  • Lower Fees: State-level fees for LLCs tend to be much lower compared to fees imposed on corporations.
  • Flexible Ownership Rules: An LLC can legally have anywhere from one member to an unlimited number of members.
  • Easy Ownership Transfers: LLC ownership can be easily transferred from person to person. This is helpful when conducting savvy investments, such as purchasing real estate with delinquent taxes
  • Safety in Numbers: Real estate investors are permitted to create a new LLC for each rental property they own as a way to shield the entire portfolio from claims made against a single property.
  • Flexible Cash Flow Distribution: Unlike other business structures, an LLC isn't required to be in proportion during cash flow distribution. That means that high performers can be financially rewarded without conflict.

Real Estate LLC Cons:

  • Annual Fees: While LLCs are extremely cheap to maintain, owners will still need to pay filing fees to keep their LLCs active in most states.
  • Potential Self-Employment Tax: Could you get saddled with self-employment tax for a real estate LLC? It's possible. The workaround is to register as an S corporation with the IRS for tax purposes while staying registered as an LLC at the state level.
  • Properties in Different States Can't Share an LLC: If you're investing across multiple states, you'll need to set up individual LLCs for each property. While this isn't a big deal, it does mean paying fees for establishing and maintaining every LLC.
  • LLCs Can Be Subject to Lawsuits: LLCs are not legally impenetrable. While LLCs provide strong protection against personality liability, there are situations where individual members can be held responsible if fraud or negligence can be proven.
  • Complications When Changing Members: There are several layers to this downside. The first is that transferring a rental property into an LLC could trigger a "due on sale" clause requiring a mortgage to be paid off when property ownership changes. There's also a potential for city, county, or state taxes to kick in when property ownership changes.

Overall, the downsides of forming a real estate LLC don’t outweigh the benefits. In many cases, proper planning can help investors avoid unexpected fees.

Real Estate LLC vs. Liability Insurance

A real estate LLC and liability insurance are not interchangeable. An LLC is a business structure that offers built-in protections against personal liability. Liability insurance is a policy that helps cover the cost of injuries, property damage, and other types of claims. 

Investors who own multifamily properties, commercial properties, or industrial properties should strongly consider having both LLC protection and liability insurance because a higher number of tenants means greater liability exposure. In general, all property owners should consider doubling up. However, landlords owning a single-family rental may be safe choosing one option.

Steps to Form a Real Estate LLC

1. Perform Due Diligence

It's important to research state-specific regulations for forming a real estate LLC. Each LLC must be formed in the state where the property is located. This is true even if you live in a different state.

In most cases, filing is handled by the secretary of state for your state.

While having experience with forming an LLC in one state may help the process along, you should expect different rules for each state. Therefore, consider consulting with a lawyer in the state where you're forming a new LLC.

2. Choose a Business Name

Feel free to bring a little creativity into this step. The LLC name designates your company as a legal entity. While every LLC must have a name, the name doesn't have to align with your name, your brand name, or any other category. Some states require LLCs to include the "LLC" designation in the name.

3. Submit Articles of Incorporation

While every state has its own rules, articles of incorporation are typically short. Expect about a page worth of documentation for this one. The general rundown for articles of incorporation includes:

  • The name of your LLC.
  • The address of your LLC.
  • A brief description of your LLC's purpose.
  • The "effective date" for your LLC.
  • The name and address of the registered agent.
  • The signature of the person filing the articles.

The person filing the LLC articles doesn't need to be the owner. In many cases, the filer is the owner's lawyer. However, some states require the names and addresses of all LLC members to be listed within the articles of incorporation. 

4. Create an Operating Agreement

An operating agreement is a core document used by LLCs to outline plans for financial and functional decisions, rules, and regulations. According to the U.S. Small Business Administration (SBA), its purpose is to govern the business's internal operations in a way that suits the specific needs of the business owners. The three purposes of the operating agreement are:

  • Protecting LLC status.
  • Clarifying verbal agreements between members.
  • Protecting agreements in the eyes of the state.

The SBA recommends that operating agreements touch on ownership percentages among members, voting rights and responsibilities, powers and duties of members and managers, distribution of profits and losses, meeting schedules, and buyout/buy-sell rules. Specificity is important. Operating agreements can ultimately settle disputes among members. 

5. Obtain Proper Permits and Licenses

Most small businesses need licenses and permits from both federal and state agencies. The most universal requirement is a state business license. In addition to obtaining permits and licenses, business owners must keep all credentials current through renewals. 

Forming a real estate LLC provides unmatched protection against personal liability. While the LLC shield isn't fully impenetrable, it prevents personal assets from being touched in ordinary cases that don't involve provable fraud or negligence. 

While anyone starting a business should investigate all structure options before forming an LLC, the LLC is almost universally the best option when seeking tax benefits and personal liability protection for a rental property.

How to Avoid Capital Gains Tax

Are you wondering how to avoid the capital gains tax

First, let's clarify exactly what the term capital gains tax means. A capital gains tax is the fee you're responsible for paying to the IRS after making a profit from selling an asset. It applies to stocks, bonds, securities, real estate, cars, boats, gold, furnishings, and other assets. 

A capital gain is assessed based on what you pay for an asset versus the amount you get when you sell it. Additionally, there are two ways capital gains are taxed, based on how long you hold an asset. 

If you hold an asset for a year before selling it, you're in the sweet spot to qualify for a favorable long term capital gains rate. However, if you sell before a year, you'll be taxed at a higher rate for a short term capital gain.

The good news is that there are plenty of tips for staying tax-free to get the perks of a capital gain without the penalties. 

1. Invest in a Tax-Deferred Savings Plan

A capital gains tax liability isn't triggered when you buy or sell securities within tax-deferred retirement plans. This includes Roth IRAs, traditional IRAs, SDIRAS, and 401(k) plans. 

Your capital gains won't be taxed until you begin withdrawing funds from your account. This strategy isn't just delaying pain until that day. Capital gains are taxed at your ordinary income rate. so people who slide into lower tax brackets after retirement can benefit. 

What's more, any Roth IRA and 401(k) funds specifically are immune to capital gains taxes under some conditions. 

2. 1031 Exchange

Are you planning to be a repeat investor? Some perpetual property investors never get stuck holding the bag with capital gains because they take advantage of the 1031 exchange loophole. 

Section 1031 of the U.S. Internal Revenue Code allows you to avoid paying gains taxes after selling an investment as long as you reinvest the proceeds from the sale within a certain window of time. The stipulation is that you must reinvest in a similar property that's of greater or equal value to the one you sold. However, this strategy is a great way to raise capital for real estate

3. The Primary Residence Exclusion

What exactly is the primary residence exclusion? This little-known IRS rule allows people who meet specific criteria to exclude $250,000 (single filers) to $500,000 (married filing jointly) in capital gains tax after making a profit from selling a home. Here's what's required:

  • The home you sold was your true primary residence.
  • You've owned and used your home as your main residence for at least two out of the five years prior to its sale date.
  • You haven't already used the primary residence exclusion for another home during the two-year period before the sale of your home.

You must report the sale of your home even if your gain is considered excludable. The IRS also provides some exceptions for the five-year usage test. Homeowners on extended duty in the military or intelligence community may be eligible to have the period bumped up to 10 years.

4. Donate to Charity

One of the smartest ways to offset capital gains if you cannot avoid selling assets when your income places you in a high tax bracket is to utilize tax deductions for charitable donations. An accountant may be able to help you donate the right amount to slide into a lower bracket to avoid a larger-than-necessary tax bill. This strategy applies if you're itemizing your deductions. 

5. Offset Gains With Losses

A capital loss is any loss on the sale of a capital asset. This includes stocks, bonds, and investment real estate. Capital losses are actually divided into long-term and short-term losses using the same calendar used for measuring long-term and short-term gains

In fact, short-term and long-term losses are actually first deducted against short-term gains and long-term gains. While tax laws are always changing, you can generally expect to be able to deduct an overall net capital loss for the year against salary, interest income, and other forms of income. Excess net capital losses can also be carried over to future tax years.

6. Invest in Long-Term Stocks

This next tip shouldn't necessarily be done without the help of a tax professional. One slightly intricate way to potentially defer capital gains tax until 2026 is by investing unrealized capital gains within 180 days of a stock sale into something called an Opportunity Fund. 

In addition, some investors take advantage of small business stocks to have up to $10 million in capital gains excluded from income. 

The trick is understanding how to invest during inflation to counteract any losses. 

8. Figure Out Your Cost Basis

You can keep more of your capital gains by subtracting the cost basis from your sale price. How you calculate cost basis can impact your capital gain rate. Many people find that adjusting the original purchase price to account for commissions and fees can reduce taxable gains.

9. Gift to Someone or Move Somewhere With a Lower Tax Bracket

Finally, some creative strategies are available if you're stuck with paying capital gains based on the way your sale price intersects with your income bracket. For example, consider gifting the appreciated asset to a family member instead of selling it. 

The IRS currently allows taxpayers to gift a person between $16,000 (single filer) and $32,000 (couple filing jointly) without needing to file a gift tax return. When you gift the asset to another person, the gains are taxed based on that person's income instead of your income. Just be cautious about using this strategy to gift assets to children or students under the age of 24 because dependents are taxed at the same rates as their parents. 

Final Thoughts on How to Avoid Capital Gains Tax

The key to understanding capital gains is knowing that the tax code rewards investors in it for the long game. The simplest way to avoid capital gains tax when selling an investment asset is to get past the one-year threshold for ownership before selling. 

Capital gains are taxed based on your ordinary income rate, so reducing income through losses, donations, or other means is the other strong alternative for avoiding a huge tax hit.


Are REITs a Good Investment? How About in Economic Downturns?

Real estate investment trusts (REITs) offer an affordable way to invest in real estate without lots of capital. 

In addition, REIT dividends can feel like a shelter in a storm because they offer consistency as an inflation investment. However, anyone considering this option should do their due diligence before they invest in real estate. 

This begs the question, are REITs a good investment? To answer this question, let’s take a look at the pros and cons of REITs, different investment options, and their outlook in the current economic climate. 

What Are REITs?

REITs are an investment option that allows you to invest in real estate without the need to purchase a property on your own. 

REITs own and operate income-producing commercial and residential properties. 

Common REIT properties include apartment buildings, office buildings, warehouses, malls, hotels, and storage facilities. So while you're not collecting monthly rent the way you would if you happened to be the sole owner, you are getting regular dividend yields with the perk of not having to take a hands-on approach to the day-to-day management or operations of the property. 

You essentially own a stake in a property in the same way you own a stake in a business when you invest in S&P 500 companies in the stock market. However, since most REITs consist of a bundled set of properties, they’re more similar to index funds or other basket goods. 

Investing in a REIT isn't the same thing as just investing in commercial real estate as part of a group. REITs are required to meet certain standards that are determined by Congress and the IRS. A legitimate and legal REIT must meet the following qualifications: 

  • Must invest at least 75% of total assets.
  • Must return a minimum of 90% of taxable income in the form of shareholder dividends annually. Consider this a big perk for your earning potential.
  • Must receive at least 75% of gross income from real estate properties in the form of rents, mortgage interest, or sales.
  • Must claim a minimum of 100 shareholders following a full year of existence.
  • Must not have more than 50% of shares held by less than five investors during the second half of the tax year.

While some REITs are labeled as equity REITs that function as "landlords," others are simply mortgage REITs that collect monthly payments from tenants after acquiring existing mortgages. Of course, finding a hybrid REIT that does both is possible. 

The perk of qualifying for a REIT is that true REITs aren't required to pay taxes at the actual corporate tax level. As a result, they are in a better position to finance real estate than other individuals or investment companies. What that means for you as an investor is that a REIT's payout can grow to create larger and larger dividends over time.

Pros and Cons of REITs

REITs and small-time investors can be a match made in heaven during a downturn because investors enjoy a decent amount of insulation from volatile exchange traded funds. After all, people will always need a place to live. So let's dive into the pros and cons to get the full picture. 

REIT Pros:

  • REITs allow you to diversify away from being dependent on bonds and stocks.
  • REITs offer high dividend yields due to the rule that REITs must pay at least 90% of taxable income to shareholders.
  • REITs allow you to diversify your investments geographically. That means you can invest in real estate in specific markets with stronger performance compared to the nation as a whole.
  • REITs offer a hands-off way to benefit from real estate investments. In addition, the personal risk is much lower than trying to flip, lease, or manage properties on your own.
  • REITs create a historically high-performing asset class. In fact, the three-year average for total returns on REITs between November 2017 and November 2020 was 11.25%. That beat the S&P 500's 9.07% for the same period.
  • REITs are pretty liquid. While unloading your own property might be a hassle, you can buy or sell REITs online quickly online using a brokerage account.
  • REITs offer power in numbers. For many people, a REIT is the only way to get access to class A office buildings as investments.

REIT Cons:

  • Rising interest rates can sometimes reduce the value of a REIT.
  • Dividends are typically taxed at your normal income rate. Of course, you'll want to chat with a CPA to maximize your tax options.
  • REITs can ebb and flow with commerce trends. While you may be riding high when spaces for cupcake shops are in demand, value can fall once the fad fades.
  • Some REITs charge high management fees. Do your homework!
  • While REITs can be great in the long term for steady and robust dividends, this isn't a good option if you're looking for dramatic short-term returns.

Who Can Invest in REITs?

Anyone can invest in a REIT. However, the bottom line isn't so crisp. This is where it becomes necessary to talk about how much is needed to invest, how much you need to be worth, and the different types of REITs available to you.

How Much Money Do You Need to Invest in a REIT?

REITs often require minimum investments ranging from $1,000 to $25,000. Most private and non-traded REITs are only open to elite accredited investors with a net worth of $1 million. For non-millionaires, the requirement is typically two to five years of annual income between $200,000 and $300,000.

Are REITs Safer Than Stocks?

It's hard to get a consensus on this. A combination of expense and lack of safety margin on stocks can make them intimidating for smaller investors. On the other hand, many people think that REITs are safer than stocks during times of inflation and uncertainty because they: 

  • Are resilient.
  • Have low debt.
  • Can potentially provide protection against inflation because rents rise with inflation. In addition, debt that is used to finance properties can be "inflated away" while property values rise.
  • Tend to have very reasonable valuations that bring stability.
  • Have been known to outperform stocks in times of rising rates.

The bottom line is that REITs aren't intended to replace your investments in stock exchanges. Instead, they are there to round out, enhance, and diversify your portfolio. While REITs can definitely have high returns, they carry some risks that aren't seen with other investment options. For instance, you may have your REIT dividends taxed as ordinary income instead of enjoying the dividend or capital gains taxes that go with stocks.

Types of REITs

The main REIT categories are the equity, mortgage, and hybrid options covered above. However, REITs are also classified by how investors buy and hold shares

The first option is a publicly-traded REIT with shares listed on a national security exchange. Publicly traded REITs are regulated by the U.S. Securities and Exchange Commission (SEC). Next, public non-traded REITs are registered with the SEC without being traded on national securities exchanges. Finally, private REITs are non-regulated REITs that sell shares to investors without being traded on national securities exchanges.

Which REIT Is Best for Me?

First, it's important to know that financial advisors can help you determine which REITs to invest in the same way they can help you to choose which stocks vs. crypto to buy. 

First-time investors are more likely to feel comfortable with publicly traded REITs because they offer the stability, transparency, regulation, and liquidity to help you find your way around this investment niche. However, it's important to know that you can get caught up in fraudulent REITs when you choose private real estate companies.

Concluding Thoughts: Are REITs a Good Investment?

REITs are worth looking into if you want a little extra protection during a potential downturn. A REIT can be a great way to get cash flow from a property without putting in any elbow grease. However, REITs should be seen as vehicles to balance stocks instead of "investment hacks" for abandoning stocks.

Three Hot Crypto Staking Misconceptions: Is It Worth It?

Is there anything more misunderstood than crypto? It's hard to find the balance between "the hype" and "the dismissals." 

Embracing digital assets doesn't need to be an all-or-nothing investing choice. Anyone who invests in cryptocurrencies has a wide range of options for earning passive income using a combination of classic stocks and commodities investments while also embracing the blockchain network. 

One particular area of interest for investors is the idea of crypto staking. While investing in cryptocurrency doesn’t involve any interest or derivatives, crypto staking allows investors to earn interest by staking their crypto on an exchange. 

In this article, we’ll discuss what crypto staking is, the benefits, and some misconceptions about staking crypto. 

What Is Crypto Staking?

Staking cryptocurrency is the process of verifying transactions on a blockchain by using coins held in a wallet or exchange to forge new blocks. Essentially, when you stake coins in your wallet or exchange, the blockchain ledger uses these coins to authenticate or verify new transactions and form new blocks. 

These blocks comprise the open ledger of the blockchain network and allow for various processes, such as trading to occur.

As an investor, crypto staking is essentially the same thing as holding cash in a savings account. Since banks don’t hold all of their capital in vaults, they need to draw cash from elsewhere for withdrawals, such as your savings. The reward for keeping your money in a bank is the interest earned for your holdings. 

Similarly, blockchain staking rewards users who hold their coins in a verified wallet or exchange them with interest.

Crypostaking is a purely passive investment, with most of the legwork being performed upfront as due diligence. With generally higher yields, crypto staking makes investing in crypto vs. stocks favor crypto. 

What Are the Benefits of Crypto Staking?

Staking allows you to benefit from your digital assets by earning rewards without selling them. Most people compare staking to placing crypto in the digital equivalent of a high-yield savings account. 

Staking is a great way for investors to get in without the barrier to entry created by the large minimal investment needed to become a full validator. 

The main benefit of staking is that you can reasonably expect to earn 10% to 20% more crypto per year when using crypto on a proof of stake network. 

There are generally two types of staking, which we will discuss below. 

What’s the Difference Between Proof of Work and Proof of Stake?

  • Proof of Work (POW). POW is an algorithm used by Bitcoin, Ethereum, and other major cryptos to secure cryptocurrencies by validating transactions and mining tokens. 
  • Proof of Stake (POS). POS is an alternative to POW that enables cryptocurrency owners to stake their coins to get permission to check and add new blocks. 

POS has been eclipsing POW because it is a more energy-efficient process. You'll need to use a cryptocurrency that uses the POS model if you want to participate in staking. 

Misconception 1: The Bubble on Crypto Staking Will Burst Any Minute

Bubble talk comes from the fact that many people presume that the extreme rise of crypto means that it's all some kind of fluke or scam. 

A true bubble means that an asset sees a rapid rise in market value during a brief time window, even though there's been no fundamental change to account for the rise in value. This essentially means that the cost of an asset greatly exceeds its intrinsic value to the point that the price isn't aligned with the asset's fundamentals. 

Yes, some smaller coins have shown some "bubble" characteristics due to rapid price escalations paired with pump-and-dump hype strategies. 

However, established cryptocurrencies have more than proven their intrinsic value while avoiding the volatility of smaller coins. One of the big value points of something like Bitcoin is that it is used for various transactions both at point-of-sale locations and online for a low cost. 

Furthermore, Bitcoin's widespread adoption as a global medium of exchange has made it a strong store of value that many people compare to gold. However, with countries adopting Bitcoin as a pegged currency and early adopters hailing it as the future of money, Bitcoin’s price is difficult to discern. 

For this reason, there exists the real potential for Bitcoin to go even higher and plenty of opportunities in staking your Bitcoin.

Misconception 2: Staking Coins Doesn't Have Any Drawbacks

Before investing, it’s important to know about the potential downsides. Keep these things in mind:

  • Some projects have minimum staking requirements that require you to lock away a minimum holding to get rewards. While this is not usually a problem, there's a potential for big losses if you lock away more than you can afford.
  • Staking requires a lock-up period that prohibits your crypto from being transferred for a specific period. That means no trading staked tokens if prices shift. As a result, a large drop in a newly staked asset could eat up interest.
  • While high staking rewards may be appealing, some staking assets are awarded on a delayed basis instead of providing daily payouts. This is important because rates of return on staking rewards are subject to change because they aren't guaranteed.
  • There are often "unstaking waiting periods" that can last more than a week.

Further, crypto networks can go bust just like any other type of business. Make sure you're doing your homework on a network that's enticing you with generous platform offers and staking rewards to avoid losing all of your staked coins.

Misconception 3: Gains Made From Cryptocurrency Staking Are Not Taxed

Yes, you need to report cryptocurrency activity on your tax returns. This is because the IRS actually classifies cryptocurrency as property. As a result, all cryptocurrency transactions are taxed as property transactions and come with a capital gains tax. 

Generally, your long-term gains will be taxed at a rate of 0%, 15%, or 20% based on your income and filing status.

Is Crypto Staking Worth It?

While some people still parrot the idea that crypto is some type of scam, I think that the widespread embracing of crypto by institutions worldwide disproves these claims pretty clearly. 

Crypto investing can be a great way to diversify your portfolio, especially if you have a self-directed IRA. However, unlike traditional crypto holdings, staking allows you to make money on your crypto while it sits in your wallet. 

The key here is to do your due diligence, especially when it comes to finding the right coin and exchanges to stake your coins. 

My takeaway? Everyone serious about investing and fascinated by cryptocurrency should give staking a chance to see if it fits with their investing strategy.

What Should You Invest In During Inflation to Remain Safe?

What are the best inflation investments? It's understandable to want to be insulated now that inflation has hit a 40-year high. Is there room for anxiety and pessimism? Sure. However, I find that it's always important to search for that silver lining when things are getting topsy-turvy in the market. 

While other people are panicking about inflation, you could be smartly pivoting to asset classes that protect against inflation. 

Unlike past eras of inflation, this particular shift in purchasing power and prices for goods and services arrives at a time when the average person has more access to financial and investing vehicles than ever before. 

You can accomplish using an app what a person during inflation in the 1970s or 1980s could only do by getting on the phone with a broker who shuffled some papers to earn a commission. This is precisely why I want to cover some highly accessible personal finance options for inflationary environments to help you determine the best channels for investment during inflation to remain safe. 

1. Short-Term Bonds

Many people overlook short-term bonds because this doesn't feel like an exotic option. However, the strength of this option is that you're keeping your money both safe and accessible. Having that money within reach can be important amid rising prices in the consumer price index. Short-term bonds also tend to be more resilient compared to long-term bonds when interest rates rise. In addition, this option gives you the choice to reinvest for higher interest rates once your bonds mature.

2. Treasury Inflation-Protected Securities (TIPS)

TIPS are actually inflation busters by design. Sold by the U.S. Treasury, TIPS have their par values adjusted each year specifically to keep up with inflation. The end result is boosted interest payments for the investor with a highly likelihood of appreciation. 

The thing to watch out for with TIPS is that you can't let your expectations equate preservation of purchasing power with guaranteed growth. While you'll never receive less than your original par value once TIPS mature, it's still possible for TIPS value to decrease during your interest payouts. The TIPS three-year daily total return is 5.43%.

3. Real Estate Investment Trusts (REITs)

If the thought of personally investing in real estate is too overwhelming or expensive, you can still invest in real estate through REITs. 

REITs are companies that own and operate income-generating real estate. Investors are paid out dividends without the need for any type of hands-on maintenance that goes along with traditional property ownership. This provides broad exposure to a pool of real estate with what can be considered a low expense. 

The stability of REITS comes from the fact that rents tend to rise as inflation rises. As a result, your wealth can also rise with REITs without committing a massive investment. 

4. Commodities

Prices for raw materials and goods tend to rise with inflation. This is why commodities can be good inflation hedges

Keep in mind that commodity prices depend heavily on supply-and-demand factors that are often beyond human control. That means that your investment can be impacted by everything from weather and geopolitical events to "influencer" trends. Here's a look at some commodities options that are particularly resilient against inflation:

  • Copper.
  • Gold.
  • Steel.
  • Crude oil.

There's no need to put all your eggs in one basket with commodities. Even tried-and-true choices like gold are prone to wild fluctuations. Diversifying commodities is important. 

Thankfully, using a self-directed IRA (SDIRA) is one of the best vehicles for holding a variety of alternative investments that don't work with regular IRAs. While a conventional IRA is intended for stocks, bonds, certificates of deposit (CDs), and exchange-traded funds (ETFs), SDIRAs allows you to manage commodities, precious metals, real estate, and much more.

5. Utility Stocks

Utility stocks are really hard to top for slow, steady growth. The reliable income streams of utility companies allow them to pay relatively high dividends. 

However, the allure of high dividends is exactly why you should do your homework on utility companies before choosing. Investors would do well to seek out stronger companies even if they present lower payouts in the short term. 

Additional Tips for Inflation Investments

Inflationary times require additional vetting before making investments. However, there are some tips to follow regardless of which areas you end up investing in. Keep these thoughts in mind:

  • 1. Look for companies capable of raising prices without necessarily harming business. This means that they're very likely to be able to raise prices without taking a revenue hit.
  • 2. While it's never a bad idea to keep some percentage of your cash liquid, you don't want to miss out on opportunities for high yield over the long term by sitting on what you have out of fear. Historically, your cash can earn a much higher interest rate when invested in stocks compared to when it's sitting in a savings account. That's not advice to pour everything into an index fund. You'll want to follow the rules of personal finance to keep more cash around if you're on a fixed income compared to someone with potential increases in earning potential.
  • 3. Branch out with cryptocurrency for retirement and short-term investing. The limited supply of cryptocurrencies could end up making this a great inflation-proof investment over the long run.
  • 4. If you're currently renting, consider that locking in a fixed rate on a mortgage might be a smart investment against the rising rental costs that accompany inflation.

There's no need to let your money sit just because inflation creates unique investing challenges. It's a matter of balancing historical returns with the current actions of the Federal Reserve to make your decisions. 

Utilizing self-managed investment tools can be a great way to ensure that you're adjusting your strategy in real-time based on market happenings.

7 Crucial Lessons About Buying Property With Delinquent Taxes

The real estate market is a driving force for most investments. Yet, sometimes, the wide range of proven investment areas and the hidden potential of seemingly unpopular niches can baffle even the seasoned investor. 

With the right strategy on how to buy a property with delinquent taxes, you can tap into a new source of revenue. Plus, such investments will provide a decent alternative income.

So how can buying property with delinquent taxes help you increase your passive income? And what steps should you follow to invest in buying tax liens properly? 

Let's find out.

1. Learn the Step-by-Step Process That Underpins the Tax Sale 

A county’s taxing authority initiates the tax lien sale due to a  homeowner's prolonged non-payment of property taxes. 

The lien purchase procedure is fairly straightforward, and it is usually similar to buying a property. Still, before investing in tax liens, you need to learn the process from the inside and sort out the legal ramifications before the deal.

A typical tax lien formation process is as follows:

  • Payment of property taxes is suspended or discontinued 
  • Debt is generated and accumulated to form a tax lien
  • Tax liens are placed up for auction
  • The tax collector transfers money acquired from the sale to cover tax liabilities
  • The highest bidder at the auction obtains the right to collect taxes from the property owner
  • The homeowner must pay the lienholder the debt plus interest or else face foreclosure

2. Select the Proper Investment Tool 

Investing in tax liens is a time-consuming yet effective way to generate additional income, so discussing the differences in tax sales— namely, tax lien sale and tax deed sale. 

The former initially entails the purchase of a tax lien to become a lienholder with no title to the property. Later, if the property owner continues to fail to pay debts, the investor has the right to foreclose on the property through litigation.

In a tax deed sale, ownership of the property is assigned to the new owner with the mandatory requirement that the entire amount owed must be paid within a short period. 

Failure to comply with these obligations will result in the new potential owner losing possession of the property, and the sale will be canceled. 

Some tax liens involve a redemption period to allow the former owner to pay off the debts. For example, according to the state law of Illinois, the redemption period constitutes 24 months, while in South Carolina, it takes only 12 months.

3. Perform a Real Estate Market Analysis

Each state sets specific real estate laws and tax procedures, so narrowing your search to one or more specific states/counties is recommended to examine the foreclosed property in more detail and understand all the legal processes governing the deal.

Also, keep in mind that low-income or financially challenged communities may offer a list of properties with a broader range of deals and exceptionally favorable terms for tax lien properties. 

Thus, research the county's financial situation and identify the most promising areas to find the best deals. 

4. Analyze Delinquent Property Options

Since purchasing a tax lien does not involve a physical inspection before signing the sale agreement, it is impossible to estimate a property’s actual value. 

Nevertheless, by requesting official data from the county, you can calculate the approximate value of the asset. If this figure is higher than the value of the tax lien itself, the deal will be considered a sound investment. 

Even with a positive estimate, however, you should keep a certain amount of funds available to restore or repair the property in the event of unforeseen situations.

5. Find Out the Hidden Fees

Of course, your primary goal is to acquire a tax lien on the property, according to all your requirements, with no additional expenses of covering debts hidden from the eyes of a potential investor when it comes to describing the delinquent property.

That is why, before the deal itself, you need to eliminate the risks associated with hidden fees and other types of unpaid taxes and outline the legal aspects and state requirements for the successful completion of the deal. 

To ensure the legality of the sale, potential investors are entitled to contact the county treasurer's office to apply for details of any extra debt.

6. Take Part in the Public Auction

According to the legislation of most states, a property tax lien can be conveyed to the taxing authority for non-payment of real estate debts. This legislative body, in turn, has the right to place the tax lien at public auction for further sale. 

Often, many counties, such as Humboldt in California, display public records regarding the upcoming auctions on their websites, detailing the minimum amount for the initial bid, type of property, and its location for the potential buyers to register and get prepared for the bidding. 

Local tax collectors can also provide the required information on the lien tax auction.

Once you've chosen a tax lien to buy, take part in so-called bidding wars and close the deal to qualify for obtaining a tax lien certificate. 

7. Getting Income From a Tax Lien Property

A tax lien certificate is an official document that authorizes you to collect all unpaid taxes from the property owner and receive interest from the property, representing a passive income source. This easy-to-learn investment requires fewer financial assets and guarantees on-time monthly accrued income. 

Basically, property tax liens can take a worthy place in the real estate investment niche due to the simplicity of executing deals and obtaining a fixed interest rate by the tax holder. 

Over time, investors earn a high level of passive income if they properly analyze the market and invest in promising investment products. Although certain risks exist when acquiring a tax lien, they can be reduced to zero with the right approach to investing and adhering to the above-mentioned points.

Tax Lien Investing: How-To Guide For Real Estate Investors

As a real estate investor, have you ever considered earning interest from property lien taxes? While tax lien investing can be risky for inexperienced buyers, it can provide outstanding returns for shrewd investors.

Tax lien investing may not be for everyone, but it can offer substantial benefits to those who understand the pros, possible cons, and process.

To successfully add tax lien certificates to your investment portfolio, you need to know how they work and the rules and potential pitfalls associated with them. 

What’s a Tax Lien?

Tax liens are legal claims placed on properties when owners fail to pay their taxes. When someone fails to pay property taxes to the government, their county or city can place a lien on their property for the unpaid amount. 

When a property has a lien on it, it can’t be sold or refinanced until someone pays the taxes to remove the lien.

Typically, a municipality will place a lien before more severe penalties occur, such as a tax levy or seizure of the property. Currently, 29 states allow tax lien sales.

What is Tax Lien Investing?

A tax lien certificate is a legal document that reflects the amount an owner owes on a property (plus any penalties and unpaid interest associated with it). Municipalities can sell these certificates to private investors via auction. The highest bidder may purchase the certificate and pay the tax bill plus any interest and fees owed.

The investor can then collect any new interest payments from the original property owner until they repay their outstanding debt. The investor may acquire their property deed if the owner fails to pay off the delinquent tax amount and associated fees within a 120-day timeframe (the redemption period).

The goal is for the property owner to pay their taxes. The investor can then make back their original investment plus any interest that accumulates. If the owner doesn’t make their payments by the expiration date, the investor must foreclose. However, most property owners redeem their property before foreclosure happens.

What are the Benefits of Tax Lien Investing?

It’s important to carefully consider whether tax lien investing is right for you. It can be a gratifying endeavor if you understand the risks and can navigate the regulations. But proper research is essential to avoid missing crucial details. 

Here are some of the top benefits keen investors may experience.

1. High-Yield Investments

Tax lien investors can profit off the tax lien’s interest rate, which can be high in some states. There’s also a chance that you’ll acquire a property for much less than its market value.

2. Low Initial Investment

Compared to many other types of real estate investing, tax lien certificates may require lower initial capital. When purchasing a tax lien certificate, you can expect to pay around 3-7% of the property’s total value (U.S. News).

3. A Passive Initial Investment Option

Some individuals like to take advantage of this type of investing without being overly involved in the bidding process. If you’re one of them, you can partner with a professional or fund manager from the National Tax Lien Association (NTLA). You may have the opportunity to invest without attending the auction, leaving the process to experts in the field.

4. Fixed Sum Payments

Once an investment resolves, you will receive a lump sum. Receiving fixed amounts can make it easier to predict your returns.

What’s the Difference Between a Tax Lien and a Tax Deed Investment?

While both liens and deeds go to auction, the buying process is quite different. For tax deeds, you’re bidding on a property title rather than a rate of return. As a result, the highest bidder will win the tax deed and become the new owner of the property.

Expert Tips for Tax Lien Investors

Consider these tips for researching, purchasing, and managing tax lien certificates successfully.

  • Do your research to avoid unnecessary risks and pitfalls throughout the process. The NTLA offers courses to prepare and educate future investors.
  • To find tax liens for sale, you can call your county tax collector or look up their website to learn the specific bidding process for your area and how to register as a bidder.
  • Consider working with a tax lien professional, especially when just getting started. Many members of the NTLA are active investors and fund managers who can help you navigate complex rules and regulations.
  • Expect to play an active role in the process. Be ready to notify the property owner that you’ve purchased the certificate in an auction. You must also inform them if they haven’t made the required payments at the end of the redemption period.
  • Don’t go into the process expecting to foreclose on a property since it rarely happens.
  • Before bidding in an auction and purchasing a tax lien certificate, ensure you understand how tax liens and auctions work in your local area. Laws vary by county.
  • Know your goals before starting the process. Prices and interest rates vary by state, so your ROI can too.
  • Diversifying your investment portfolio can help minimize the risk.

Real Estate Investing

If you’re an experienced investor who understands the real estate market, tax lien investing could be a smart move. Doing your due diligence can make it worthwhile, making the process easier and earning you a higher return on investment. Speak with a financial advisor or real estate agent to get started.