“Should I buy tax lien certificates and tax deeds in your name or a business name?” Is a question that newbie tax lien and tax deed investors ask me quite often. The answer to this question really depends on your specific situation. It’s my opinion that when buying tax deeds, it’s better to buy the deeds in a business name because it affords you some liability protection. That is something you can to discuss with your lawyer and accountant. When you buy tax lien certificates, however, it’s not always an advantage to buy them in a business name for 2 reasons.
First, If you purchase a certain volume of tax liens and you do it through business entity, your profits will be considered business income and not investment income. That could make a difference come tax time. So this is something that you need to discuss with your accountant.
Secondly, many states require that your business entity be registered to business in their state in order to register to bid at the tax sale. If you’re bidding in your own name in another state, however, there is no such requirement. So it can cost you more to register to bid at tax sales that are in states other than the state your entity is registered in.
Your tax liens or redeemable deeds are not going to show up on a title search or credit report. If someone wanted to find out what tax liens you own, they’d have to do a search in every county you invest in. And since you don’t own the property, you don’t have any liability for it yet. Not until you actually foreclose the right of redemption and record a deed to the property to you actually own it. And at that time you can transfer it to a business or holding company. Don’t let not having a business entity to invest with stop you from investing in tax liens!
You can also buy tax liens and tax deeds inside your self-directed IRA or Solo 401K. In order to purchase tax liens or redeemable deeds, you’ll need to acquire a unique tax ID number for your retirement account. The county or municipality will require that you provide a tax ID number. You can’t use your custodian’s tax ID number because other investors might have the same custodian for their account. You can request a EIN (Employment Identification Number) for your IRA, Solo 401K, or Qualified Retirement Plan from http://irs.gov.
Note from the Author: This article was first published in 2010 and updated and republished in May 2019. I am not an attorney, or accountant, nor am I a financial planner. This is simply my opinion as an investor.
By Brian Thompson April 24, 2012 - 11:44 am
Joanne
Thanks — I know I can use the LLC to sponsor a solo 401 plan , but the problem I am having is finding a CPA that can answer – is my LLC that buys tax liens/certificates a real business in the eyes of the IRS, and or is it considered an investments or does it not matter what it is considered so the LLC can go ahead an sponsor a solo 401 plan. If I can do this I want to rollmy simple IRA into the solo and use it also to buy tax liens, but If I am wrong I could end up being taxed and penalized on those monies. Thank you for your time
By Brian Thompson April 23, 2012 - 9:31 am
Thank you Joanne –
Does the IRS consider a single member LLC business that buys Tax liens/certificates and deeds a legitement business– and can I also use the LLC to sponsor a solo 401 plan which I would roll my simple 401 into so I could also buy tax liens with the solo 401. or would the LLC be considered an investment or hobbie and not be capable of being a plan sponor for a solo 401?
By Joanne April 24, 2012 - 10:57 am
Hi Brian,
I am the wrong person to ask about IRS regulations, I leave all that up to my accountant. I do beleive that you can use the LLC to sponsor a solo 401 K plan and the person that I would talk to about that is attorney Tim Berry. He would be able to set up such a plan for you and can answer your questions about it a lot better than I can. You can contact him at tim@iraideas.com.
By Joanne April 20, 2012 - 7:53 pm
Sorry Brian, This is a question for Bob, not for me, I’m not an accountant or CPA. I defer!
By Brian Thompson April 20, 2012 - 3:07 pm
Bob Olson and or Joanne or anyone
Does the IRS consider a single member LLC business that buys Tax liens/certificates and deeds a business – and can I also use the LLC to sponsor a solo 401 plan which I would roll my simple 401 into so I could also buy tax liens with the solo 401. or would the LLC be considered an investment or hobbie and not be capable of being a plan sponor for a solo 401?
By david April 9, 2012 - 11:53 pm
You spelled sense wrong.
By Joanne April 10, 2012 - 10:11 am
Thanks David,
All spelling errors have been fixed. I actually found another one besides the one that you found. I often put these blog posts up right away and don’t have time to check for spelling errors.
By Brian April 22, 2011 - 7:37 am
Joanne,
Thank you. This is very helpful.
On a tax lien related question…I live in Georga. I got a notice from HOA on a condo I bought on tax sale last year assessing fine on toileting. I was confused, as 1 year redemption period is not over, so I am not the owner although tax record is showing I am the owner. Am I responsible for it, or can I simply ignore the notice?
By Joanne April 22, 2011 - 11:40 am
The HOA just wants to be paid so their sending you the bill. Don’t pay it until you are actually the owner. HOA fees are not like municipal or county liens, they cannot be sold at the tax sale. You are not responsible for it yet, but you will be when you foreclose on the property. However you can try to negotiate with the HOA and tell them that you were not the owner until you foreclosed on the property. They may still expect you to pay, not only that but they may also have a transfer fee that will expect you to pay as well.
One thing that you may want to do is check with the county. Find out if you do what fees if any will be added to your deed and will have to reimbursed to you with penalty should the deed be redeemed. I would not pay the HOA unless this payment will be returned to you upon redemption with penalties, which I don’t think it will.
It’s always good to find a Georgia attorney now, who can help you with the foreclosure when it’s time to foreclose and then you can also ask your attorney about things like this because I am not a lawyer and I’m not familiar with the local laws in your states. My advice is for educational purposes only and should not be taken as legal advice.
By Brian April 17, 2011 - 10:45 pm
I am new to tax lien investment. I used my own name or business name( One member LLC) to do business.
Where should I report the inocme on the tax return? I was told I report the income under my own name on Sche-E, but income from LLC on sche-C.
Can someone please tell me whether this is correct?
Thanks
By Joanne April 20, 2011 - 10:58 am
Hi Brian,
This is a question for your accountant. I tried to look on my tax returns to see how it was reported there, but for the past 2 years I’ve had liens redeem in either my name or my husbands name and that went on a Sche-E. Although I have a single member LLC, like you do, I did not have liens redeem in the last 2 years (which are the only tax returns that aren’t filed away in storage) that where in the name of LLC.
I would think that the income would get reported on a sche-C, not a sche-E, since your LLC is earning the interest, but I’m not an accountant. This is a question better answered by a professional. I stopped doing my own taxes when we had 2 LLCs, in addition to my husbands job.
By Jesus April 2, 2011 - 11:42 pm
Thanks everyone for the great information. I still have a question which is about a web site call legalzoom.com anybody have any input about them. I here is cheap and easy to file a LLC anywhere in the USA, please advise.
Jesus
By Joanne April 4, 2011 - 11:24 am
Hi Jesus,
I have a membership to Prepaid Legal, which I think is similar to Legal Zoom. What Legal Zoom does is provide standardized legal forms, which are good for some things, but I’m not too sure about setting up an LLC without a legal consultation. With Prepaid Legal I get a legal professional to review contracts or answer legal questions for me. I don’t know if they do that at Legal Zoom. I don’t how much time they actually put into setting up your LLC. The truth is that in most states you can do it yourself, online. The problem with that is that you may be overlooking things that might be important. I used my accountant to set my LLC years ago, and I also did it myself later when I moved to another state. Both times I did not do things the way that I should have. If I had spoken to a lawyer, I could have learned more about asset protection and the best way to set up my LLC. One product that I can recommend to you, to teach you the correct way to set up your LLC and what the differences are in each state is The Wealth Building LLC by Darius Barazandeh. You can find it along with other resources that I recommend at http://www.TaxLienLady.com/resources.htm.
By David January 18, 2011 - 2:29 am
Hi all.
Great information.
After many hours of research, I feel that Nevada is the best state to set up your LLC. It’s statutory laws are stronger then any other state. Nevada’s costs are in line with that of most states. In my opinion, even if it where a few bucks more, I would still prefer to pay a little extra to NOT have my corporate veil peirced. After all, most investors already have so much invested and I would hate to the thought of losing my home and personal belongings in the event of a liability. My personal assets are much more important to me then the extra fee it would cost to have it in the jurisdiction of Nevada.
By Arnie December 4, 2010 - 3:11 pm
It’s now December 1, 2010 and I will be setting up a self-directed IRA LLC. Custodian probably Sunwest Trust, then an LLC setup company (Allan Bergman’s company probably). Any advantage to wait to Jan. 1, set up now, or doesn’t matter? LLC state fees, etc?
By Joanne December 4, 2010 - 3:30 pm
Hi Arnie,
that all depends on your tax situation, and I’m not a CPA. That’s a question for your CPA or tax professional. Sorry I couldn’t be of more help to you on this, but I wouldn’t want to steer you wrong.
Joanne
By Julie December 4, 2010 - 12:41 am
My question is not related with LLC for investing but I just want to take this chance to ask this question because it seems that there are a lot of tax lien and tax deed investors in this thread. Maybe you have some information about this. I am looking for a good and credible website where i can invest in tax lien and tax deed. Maybe you can recommended something. Also, I am looking for a free online search for property record.
I appreciate any information, thanks in advance.
By Joanne December 4, 2010 - 3:27 pm
Hi Julie,
This your question is not really related to this blog post I will answer it in the next blog later today. So keep and eye out, you may want to sign up for e-mail notifications of posts in the upper right side bar.
Joanne
By Mark Schwartz December 2, 2010 - 4:20 pm
Please keep in mind that if you set up a LLC for investing purposes you tend to complicate your tax preparation issues. If you are a small time investor keep it simple. After I set up a LLC for real estate investment purposes I ended up having to hire a CPA to do my taxes to the tune of about $1300 a year.
Because I live in Washington, I set up a WA LLC and if I recall correctly it was only about $135 and $55 recurring.
Good conversation thread! Also, nolo.com has a lot of great info on setting up LLCs, etc. (No, I am not affiliated with them.)
Mark
By Brian Templeton December 2, 2010 - 2:17 pm
Hello Joanne,
I have a Wyoming corporation :- “Berwick-Templeton Investments
International Inc.”, I also have a E.I.N.# from the I.R.S.
Brian Templeton (btempleton4112@msn.com)
By Joanne December 2, 2010 - 2:07 pm
Hi Everyone,
I just found a great blog post about the advantages of setting up a Nevada LLC, it’s old from the spring of 2009, but it’s written by another tax lien investor and trainer. Here’s the link:
http://rogueinvestor.blogspot.com/2009/04/nevada-llcs.html
I don’t know if anything has changed since this post was written.
By Joanne December 2, 2010 - 2:05 pm
Hi Brian,
I’m glad that you enjoyed the webinar with Don Fullman of PIP West, they are the only tax lien agent that I’m recommending right now.
By Brian Templeton December 2, 2010 - 6:00 am
Hello Joanne,
I enjoyed your interview with Don Fullman very much, I did get a lot of useful information, I will be e-mailing Dom about investing with
his company tomorrow. Thank you very much !!
Brian Templeton (Calgary, Canada)
btempleton4112@msn.com
By Joanne December 2, 2010 - 12:07 am
Great information Kristin, thanks! I’ve heard that CA was not a good state to set up an LLC, even if you live in CA. Now I know why.
By Kristin Edmark December 1, 2010 - 11:59 pm
Dear Joanne,
California is an expensive state to maintain an LLC. In addition to the $800 minimum tax, an annual LLC fee is imposed based upon total income from all sources reportable to California (range from $500 to $4,000). Non-resident members may either file a group non-resident return and pay California income tax; or file a Form 3832 consenting to the jurisdiction of the state of California. If any LLC member fails to sign Form 3832, the LLC is required to pay tax on the member?s distributive share at the highest marginal rate (11%). Also, the LLC must have adequate capitalization in case of a lawsuit. I am unsure of amount of capitalization required but it may have recently changed from $100K to $200K. I believe that law in California is less favorable for the entity being sued than other states.
It looks like Tennessee has an annual fee of $300. Other states have lower annual fees. I don’t believe there is a fee for Missouri.
By Joanne December 1, 2010 - 11:33 pm
Hi Anne and Juan Calero,
I think that right now many foreigners are interested in investing in the US, especially in all types of real estate markets. Right now the America is on sale. I’ve heard that it’s the cheapest real estate in the developed world – don’t know if that’s really true or not, and now it’s on sale. Great time to buy if you have the cash. And it’s also a great time to make money on US real estate without purchasing it buy investing in tax liens. I think that Florida is a good state for foreign investors to start in because as long as you do your due diligence you don’t have to worry about owning the property if you invest in liens. However if you want to own property you can invest in deeds in Florida and some of the counties have online deed sales as well as online lien sales. I would check out Lee County.
You will need a US bank account to invest in liens or deeds and a tax ID #. You can get an idividual tax number (ITIN number) or a Employer Tax ID # for your LLC (EIN number) on the IRS web site at http://www.IRS.gov.
To get an EIN number you will need to have a US LLC.
Anne you may want to check with my friends at PIP West. Platinum Investment Properties West is a tax lien investing agent. They invest in Illinois, Texas, and Georgia. the states that have the highest interest rates for investors. You can watch a webinar recording that I did with Don Fullman of PIPWest at http://www.taxlienlady.com/PIPWest.
By juan calero December 1, 2010 - 8:16 pm
Dear Joanne.
Many thanks for bringing this topic.
I am not a US citizen, and definitely will open a company and entity in the USA, in order to buy Tax deeds and tax liens, i think for foreigners, this is the best way.
warm regards
juan calero saldivar.
By Anne December 1, 2010 - 7:43 pm
Hi,
I have (unsuccessfully) been trying to find out the best options for structuring a portfolio arm for tax lien and other property investing trough a single entity and also a Self Managed Super Fund (SMSF). I have no contacts in the states so anywhere is a possible starting point. I reside in Brisbane Australia. If anyone has some suggestions it would be appreciated. It is interesting how many sites assume you are a US citizen then drop the bundle when you aren’t.
Cheers (and Merry Christmas:)
Anne
By Joanne December 1, 2010 - 7:24 pm
Wow! Thanks for all the great information Bob. Sounds like there is enough involved with this to do a webinar about it. And I think that others would also be interested in getting that information before tax time. If it sounds like something you’d be interested in – and who knows maybe you can pick up some clients, send me an e-mail at joannemusa@taxlienlady.com and we’ll talk about it.
By Bob December 1, 2010 - 7:01 pm
Hi Joanne:
The IRS has always taken the position that the revenue that is generated by any business entity (tax-lien investing is no different) maintains its original character. That means that if the revenue is received from investment activities, then it remains investment revenue (interest income/capital gains) and is reported as such on the business’s tax return.
If the business happens to be a “flow through” type of entity (a partnership, a SubChapter S corporation or an LLC) then the interest income/capital gain income actually ends up flowing through to the individual owner(s) on a Form K-1 or on the Schedule C if the entity is a single member LLC as interest income/capital gain income.
On one hand, this can be good since interest income is NOT classified as “self-employment” income and therefore won’t be subject to Self-Employment Tax (Social Security and Medicare tax).
However, an important issue for a business entity that invests in tax-liens is “how do you get the money out of the business??” Well this opens up a whole new set of options and a big can of worms. one answer is this: The owner can draw a salary as the “owner and operator” of the business. But that would trigger Social security, Medicare, Federal and State withholding, Forms W-2, etc. Kind of messy, but the owner can now contribute to a retirement plan, which would shelter some of the income and set up savings for the future, which is a good thing.
If you can’t tell already, this is a lot more complicated than most investors realize. Everyone is a little different and my solution is most likely different than yours since my financial and investing objectives may be different than yours.
Sorry to ramble on like this!! Let me know if you or your students have any other questions. I’ve been a CPA in public practice (with extensive real estate experience) for more than 30 years and am now actively involved in tax-lien investing (for myself and for my clients).
Talk to you soon,
Bob Olsen
By Joanne December 1, 2010 - 6:52 pm
Hi Michael,
I don’t know about Tennessee. I do know that California is not a good state to form an LLC in. I would check with your attorney and if your lawyer can’t answer this question for you, then find one that knows about entities and asset protection.
By Michael December 1, 2010 - 6:43 pm
I am planning on investing through a Self-Directed, Roth IRA, so no tax liabilities to the Feds is my understanding. However, I live in California so am interested in the “best” state to set up an LLC when investments get larger. Any suggestions? I own property in Tennessee. Is that a friendly state?
Michael
By Komala Valli December 1, 2010 - 6:27 pm
Thanks for the input. I understand now.
By Joanne December 1, 2010 - 3:02 pm
Thanks for the input Bob, I have a question for you. What if you have a business for the purpose of investing in tax liens, is the income considered business income or can interest income? It is still reported as interest income on a 1099 isn’t it, so could you declair it to be interest and not regular income even if the purpose of your business is tax lien investing?
By Bob December 1, 2010 - 2:52 pm
Hi Everyone:
LLC’s are indeed unique “tax animals”. A “Single-Member” (one owner) LLC is NOT required to file a separate Federal or State income tax return. The income and expenses of this type of LLC are instead reported to the IRS on a Schedule C (in the same manner as a Sole Proprietorship) that is attached to the taxpayer’s Form 1040. The State filing usually is generated from the taxpayer’s Form 1040 so there isn’t any special tax reporting feature for the state either.
“Multiple-Member” LLC’s however have a number of other filing options available to them, some easy, some complicated. Check with a “competent CPA” for guidance.
One other point of clarification is the character of the income that is generated from tax lien investing. Any income derived from tax lien investing (interest income, capital gains, etc.) RETAINS its character when it flows through an LLC, Sub S Corporation, Partnership, etc. It is not “magically” transformed into “Business Income” simply because it flows through a business entity. Sorry about that!! That’s actually a very good thing for a number of reasons that I don’t have enough room to discuss here.
I hope this helps.
Bob Olsen, CPA
St. Louis, Missouri
By Michael December 1, 2010 - 1:53 pm
Another thing to consider is that you will need to file an additional federal & state tax return for the LLC or corporation that you set up for tax liens purchases.
By Joanne December 1, 2010 - 11:59 am
Also I have heard that Washington is the best state to form an LLC in, but I think that has to do with asset protection and not so much cost. As you can tell I don’t know a lot about this subject. Does anyone know which states are good and which are not for setting up an LLC? I do know that many companies incorporate in the state of Delaware for privacy and asset protection.
By Carin December 1, 2010 - 11:50 am
Agree with Joanne – if you only purchase few tax liens, you can do it in your name. For more liability protection and large amount of tax lien investment, you may want invest under LLC.
By Joanne December 1, 2010 - 11:46 am
Hi Barry,
I’m not familiar with setting up Nevada LLC. I know that in the past many people used a Nevada LLC for asset protection and liability reasons. However I have heard something about it getting more expensive to have a Nevada LLC, due to annual fees. I really think that the best way to do it is to set up an LLC in your state, if your state is not too expensive. Some states don’t have the same protection from creditors that other states do and some states have high fees (California for instance). But when you do set up an LLC in another state, you need to have an agent there to accept your mail for you. You need to have an address in that state.
Also it is best to use a lawyer. Most states do have business web sites that allow you to set up an LLC yourself, but I recommend using an attorney. I set up my LLC myself and then found out that I could have done things differently to better protect myself. A good program to help you understand setting up an LLC is Darius Barazandeh’s Wealth Building LLC. It’s on the resource page of my site at http://www.taxlienlady.com/resources.htm
By Barry Clark December 1, 2010 - 11:13 am
Dear Joanne,I agree with you that it makes sense to set up an LLC.What/where is the cheapest LLC that one can set up in Nevada?Regards,Barry