Real Estate Investor · Baltimore, MD · Member since 2008 · 1k+ posts · 268 votes
How are tax liens investments being taxed? I am yet to speak with an accountant thus ask the question here to get an idea.
I have bought the tax liens past summer. Most of them were redeemed within the first couple of months. On the rest I am hiring an attorney to proceed with the foreclosure.
Anticipating they will get redeemed before the summer of next year (holding period is less than a year), am I going to pay a regular income tax rate on the collected interest? I understand the tax liens are passive investments in nature, but I am not sure if the 12-months holding period applies to them.
Well now you have spoken with an accountant, this type of investment income is taxed as ordinary income. There is no long or short term holding period. If you are going to continue this process you will be considered a business by the IRS and will have to either
1. File a Schedule C
or
2. Incorporate
I would recommend an LLC that files as an S-corp.
However, if this is just a casual one or two that you buy a year. You should just recognize them as interest.
I am licensed by the Department of Treasury in taxation. I represent taxpayers and businesses before the IRS.
I speak tax.
Well now you have spoken with an accountant, this type of investment income is taxed as ordinary income. There is no long or short term holding period. If you are going to continue this process you will be considered a business by the IRS and will have to either
1. File a Schedule C
or
2. Incorporate
I would recommend an LLC that files as an S-corp.
However, if this is just a casual one or two that you buy a year. You should just recognize them as interest.
I am licensed by the Department of Treasury in taxation. I represent taxpayers and businesses before the IRS.
I speak tax.
Thank you Steven
I have purchased the liens in my name this year.
Next year I guess it'd make sense to purchase them in the name of my LLC ?
Can you recommend a book on LLC taxation for real estate enterpreneurs please?
That would only be advised if you were to start doing a lot of business in tax liens. If it is just a hobby by a couple per year. Than you would be better just receiving the interest.
There are not really any books on LLC taxation that I can think of off the top of my head. That is because the IRS considers and LLC a disregarded entity. You choose how you want the LLC to operate: as an S-corp, C-corp, sole proprietor, or even a partnership with someone else. Again, it depends upon the volume you are doing versus the costs of an entity.
How are tax liens investments being taxed? I am yet to speak with an accountant thus ask the question here to get an idea.
I have bought the tax liens past summer. Most of them were redeemed within the first couple of months. On the rest I am hiring an attorney to proceed with the foreclosure.
Anticipating they will get redeemed before the summer of next year (holding period is less than a year), am I going to pay a regular income tax rate on the collected interest? I understand the tax liens are passive investments in nature, but I am not sure if the 12-months holding period applies to them.
Whoa whoa, why are you complicating this so much buddy. Why are you hiring an attorney? I have been doing tax liens for years and never needed an attorney once. As Steve said, if your gonna do a few a year then dont worry about it and file it as ordinary income. When you start moving 10 or more a month then incorporate yourself and move forward with that.
Also, why are you buying current years? Why not buy Older tax liens so you can file the tax deed applications IMMEDIATELY.
Whoa whoa, why are you complicating this so much buddy. Why are you hiring an attorney? I have been doing tax liens for years and never needed an attorney once. As Steve said, if your gonna do a few a year then dont worry about it and file it as ordinary income. When you start moving 10 or more a month then incorporate yourself and move forward with that.
Also, why are you buying current years? Why not buy Older tax liens so you can file the tax deed applications IMMEDIATELY.
As you are probably aware, each municipality has different guidelines. Here in Maryland, for example, tax liens are not converted into tax deeds. Instead, the tax lien holder must initiate the foreclosure of rights of redemption of the property. This is an extensive procedure completed by attorneys. If you have any interest, you may read about it here: http://www.montgomerycountymd.gov/apps/taxliensale/ - scroll down to "ACTIONS TO FORECLOSE".
Makes sense?
As you are probably aware, each municipality has different guidelines. Here in Maryland, for example, tax liens are not converted into tax deeds. Instead, the tax lien holder must initiate the foreclosure of rights of redemption of the property. This is an extensive procedure completed by attorneys. If you have any interest, you may read about it here: http://www.montgomerycountymd.gov/apps/taxliensale/ - scroll down to "ACTIONS TO FORECLOSE".
Makes sense?
Umm no it doesn't make sense, can you please show me where it says "This is an extensive procedure completed by attorneys." ???
What it does say is "The holder of a certificate of sale may at any time after the expiration of six months from the date of sale, file a complaint in the Circuit Court to foreclose all rights of redemption of the property to which such certificate relates. These are papers you can file on your own for a fee (usually a small fee but depends) or even online. Majority of the counties do it online and YOU never step foot in a court room or have to hire a lawyer.
So back to the question, why are you complicating it by getting an attorney? Are you investing that much in to a deal that you need an attorney to walk you through it? Im not trying to give you a hard time but many of us here including myself have done tax liens in many different states and know how it works. If you wanna spend the money to get an attorney go for it, knock yourself out, All im trying to say is that its not really necessary.
Adrian, (in Maryland) it is not a matter of filing one piece of paper. You CANNOT do it online. And filing the certificate is ONE OF the steps in this tiresome legal procedure.
You do not have to take my word for it, however you may be assured that I have done a research on the matter. Hiring an attorney is worth the money.
It depends on what you get at the end. In your case, because they are redeemed, then all you have is interest income which is passive income. If the properties are not redeemed and you foreclose, then it depends on your investment intent at that time. If you hold the properties, then it's passive but if your intent is to flip, then it is active subject to Self Employment Taxes.