The subtitle of Moskowitz’s book is “How to get high interest rates in a low interest world with tax lien certificates.” That’s a fair description.

I have heard nothing bad about investing in tax lien certificates. I rarely can say that about an investment. The return is generally in double digits. There is virtually no management. The risk is much lower than a first mortgage because the lien-to-value ratio is extremely low. And it’s possible to enjoy the windfall benefit of becoming the owner of unredeemed property at a fraction of its market value.

Bargain purchase

Moskowitz tells of one person, “Jim,” who bought a tax lien certificate for $10,000 on a New Jersey condo worth $200,000, and ended up owning the condo, where he now lives, when the owner failed to redeem the certificate. I don’t understand why authors are so coy about their case histories. I always try to get the subject to let me give his name and phone number and have been successful hundreds of times. The subjects typically report that only one or two people, if any, called them. And they enjoyed the calls. My case histories almost always have numbers that are less round than $10,000 and $200,000. All of which makes wonder if there really is a Jim. But I do know that it is possible to make a super bargain purchase by buying a tax lien certificate that is not redeemed.

Legal details

Moskowitz is an attorney and the book is strong in its legal aspects as a result. He emphasizes it is important to dot all “i”s and cross all “t”s in the lien certificate business. For example, to foreclose, you have to notify all who are “interested in the property.” Citing various legal authorities, Moskowitz says that includes notifying lessees, mortgage holders, heirs. Of course, you also have to notify the owner of the property by use of a process server.

Income taxes

Moskowitz says something that I never heard before and which I suspect is not true. That is, you might owe income taxes on a gain at the time of the foreclosure. For example, Jim above, would have a $200,000 - $10,000 = $190,000 gain the day he acquired title to his bargain condo. I would have said he has one heck of a low basis. But he has no gain or tax liability until he sells.

Moskowitz says IRS regulation 1.66-6(b) may make the acquisition a taxable event. That reg applies to lenders taking title to a property which secured a loan they made and is designed to rationalize other aspects of the tax law pertaining to lenders. I doubt it could be applied to tax lien foreclosures by the IRS. Indeed, there is no evidence they have ever even thought of doing so.

Amazingly, some tax lien certificates are overpriced

Even though the lien-to-value ratio is only pennies on the dollar in the vast majority of certificates, there are cases when the price of the lien certificate is more than the value of the property that secures it. For example, some property is contaminated. Others are unbuildable for various reasons. So some selectivity is still required. Tax lien certificates are not available in all states. Moskowitz lists the following in his appendix: AL, AZ, CO, FL, GA, IL, IA, KY, LA, MD, MA, MI, MS, MO, NE, NH, NJ, NY, ND, OK, RI, SC, SD, VT, WV, WY. Some, like Georgia, pay less than 16% interest.

This originally appeared in Real Estate Investor’s Monthly newsletter.