Tax Lien Defined
If the owner of real estate is delinquent in paying his property taxes, the county or other taxing units sells its right to foreclose. The sale of tax liens is done at a public auction. Because the county is hungry for tax revenue, the purchase price of these tax liens generally falls in the hundreds of dollars. As a result, solo 401k investors just starting out and with low account balances find tax liens to be an attractive investment. Also, returns can be as high as 12 to 16 percent a year.
Locating Tax Liens
You can contact the local tax authority or do an internet search for tax liens followed by the name of the city. You will be provided with the date and time of the sale as well as a list of delinquent properties.
Purchasing Tax Liens
At auction, the county or state will require payment within 48 hours. As the trustee of the solo 401k, you go to the bank and have the banker issue a cashier’s check from the solo 401k bank account on the day of the auction.
Holding the Tax Liens
After the lien is obtained, if the property owner pays the delinquent taxes (redeems the line), the proceeds are deposited into the solo 401k bank account. On the other hand, if three years of delinquencies pass, the solo 401k trust can foreclose on the property and title to the property is taken in the name of the solo 401k trust.
Roth Tax Lien QUESTION:
I would like to open a Roth solo 401k and put the existing tax lien holding from my existing per-tax solo 401k under the Roth. What is the procedure?
A Roth solo 401k designated account will need to be opened under the existing solo 41k plan, and then the tax lien can be converted in-kind to the Roth solo 401k designated account. This setup would be covered in our service.
Tax Lien Fees QUESTION:
There will be attorney fees, repair costs etc. continuously. My solo 401K Trust may not have enough money to pay for all those expenses. Can it borrow from people in the family or someone else? How should it be done?
No, the solo 401k cannot get a loan for this type of investment as the rules do not allow for it. Instead, you would need to make an annual solo 401k contribution based on your net self-employment income, or you could transfer other Traditional IRA or former employer plan funds to the solo 401k which would then be converted to the Roth solo 401k. These funds can then be used to cover such expenses since the tax lien is an asset of the solo 4o1k.
Tax Lien Registration QUESTION:
The tax sale auction for Cook County, Illinois tax liens is now open for registration. (https://www.cooktaxsale.com/index.cfm) Do I need to register a certain way to use mysolo401k monies to buy the tax liens? For example, there is an option to register using an EIN# for entities, and an option to use a social security# for individuals. I’m thinking my solo 401k is an entity and I should use the appropriate EIN# for it.
Since the solo 401k trust is making the investment, correct that the registration should read in the name of the solo 401k plan and use the plan's EIN not your SSN for reporting purposes.
Property QUESTION:
I bought a tax lien in Memphis, TN and ended up getting the property. Now the Solo 401k owns the property. I want to sell the property, , is it any problems selling the property and does it have to sell for more than I bought the lien for?
The property can be sold at fair market value. The proceeds from the sale of the property would flow back to the Solo 401(k) and you can then reinvest the funds in real estate or other types of alternative investments.
