Investing In Tax Liens And Tax Deeds Through A Self-Directed IRA

Forbes

22-07-2025

Jaime Raskulinecz, founder/CEO of Next Generation Trust Company, specializing in custodial & administrative services for self-directed IRAs.
As I have shared in the past, real estate is one of the most popular alternative assets allowed in self-directed IRAs. There is one aspect of real estate investment that people may not realize they can include in their self-directed retirement account: tax liens.
Using a self-directed IRA (SDIRA) or solo 401(k) plan, investors can further diversify their portfolios by including this asset class, which generates passive income and can offer high returns within a tax-advantaged plan.
What Is A Tax Lien?
A tax lien is a legal matter, a claim against a piece of real estate when an owner does not pay the property taxes. The property in question can be a single-family home, a multifamily property or a commercial property.
The municipality in which the property is located—and which is unable to collect that tax debt—puts a lien on the property; this represents the municipality's right to foreclose on it. These liens become investment opportunities when the municipality that is trying to collect the debt (the lien holder) sells them through either a tax lien certificate or a tax lien deed. This is done at a public auction. These certificates or deeds are alternative assets that can become investments in an SDIRA or solo 401(k) for self-employed taxpayers and business owners who don't have employees (except a spouse).
Compared to many other types of real estate investments, tax liens are relatively short-term (a year or a few years), which may be attractive to some investors.
The Difference Between Tax Lien Certificates And Tax Lien Deeds
Think of this as a loan to cover the delinquent taxes. The investor (in this case, the self-directed retirement account) pays off the taxes and interest and provides a redemption period to the property owner in which to pay back that money to the retirement account. The payments for the back taxes and interest generate investment income.
If at the end of that period (usually one to three years) the property owner cannot make the debt whole, the property is transferred to the SDIRA or solo 401(k); the retirement account will then hold the deed on property it acquired for the cost of the tax debt it paid and can sell the property for additional investment income.
In this scenario, the investor is bidding to buy the deed to the property without providing a grace period to the property owner. This is more of a 'one and done' transaction. The IRA or solo 401(k) with the winning bid becomes the new owner and can retain the property as an investment for the long term, fix it and flip it or sell it right away. This upfront purchase usually means paying more with smaller profit margins later, but it is a more streamlined transaction since there is no property owner to deal with after the sale is completed.
The investment income stays within the tax-advantaged account and can be used to invest in other tax liens or the myriad alternative assets self-directed plans allow. Funds to renovate the property must also come from the SDIRA or 401(k) plan.
Investor Beware
As I always counsel my clients, make sure to do your thorough research about the property, local market values and regulations and the foreclosure process before making this self-directed investment.
You can invest through a traditional or a Roth IRA, so you should consult a trusted advisor about which retirement plan makes the most sense for your overall financial situation and goals. Investing with a solo 401(k) is a bit different.
You may not personally benefit from the investment (such as living in the house after the plan takes ownership, using it as a personal vacation property or renting to family members), which constitutes prohibited transactions. You also cannot buy a tax lien on a property you, certain relatives or business partners own.
In self-direction, the plan custodian holds the asset and executes the investment instructions; in this case, the custodian holds the legal title to the lien 'for benefit of' your self-directed account. Your IRA custodian can explain the IRS guidelines to help you maintain your investment's tax advantages, stay compliant and avoid triggering a penalty.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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