In the midst of purchasing several tax certificates in City of Chicago. Had a quick question how is this reported in your federal tax return? I figure it is reported when the tax certificate is terminated due to redemption, sale, etc.
@Sami Davis if it is a tax Lien certificate, when the property redeems, the additional amount is interest and should be reported as such. You will probably get a 1099 from the city or county stating the amount you earned.
If you foreclose on the property it becomes an asset. There is nothing to report at that time, but it does get added to your balance sheet. When you sell, you subtract your basis in the property (the original cost and any improvements), and the remaining amount is a capital gain. If you sell immediately it is a short term capital gain and treated as ordinary income. If you hold it longer it may be taxed as a long term capital gain.
If it is a tax deed, I suspect the taxation is very different.
I am not an accountant please seek professional legal and accounting advice.
Exactly what @Ned Carey said. I get a 1099 for all liens redeemed. For liens that are foreclosed, it is treated as any other asset