Tax Liens and Deeds
Tax Liens and Deeds in your IRA
Investing in tax liens and deeds has the potential to be quite lucrative. It is also possible to invest in tax liens and deeds with less capital than may be required for other investments such as rental properties. As such, this is one of the more popular investment choices for holders of Self-Directed IRA LLC and Solo 401(k) programs.
What are Tax Liens & Deeds?
Tax liens are a mechanism used by local governments to remedy the failure of a property owner to pay real estate taxes. Tax liens may be levied on any kind of property, from raw land to homes to commercial properties. The rules surrounding the type of lien and how such liens are issued and redeemed varies by state and by county. There are two main classes, tax liens and tax deeds.
A tax lien is issued immediately once they property owner has failed to pay their taxes. The lien applies a first position encumbrance on the property ahead of all other liens, including mortgages. Such liens are then offered for sale to the public. An investor purchases the lien, thus providing the municipality with the necessary tax revenue, and then has the right to the property. If the property owner pays their taxes, the investor generally receives interest which can be in the range of 12-18%. If the property owner fails to redeem the property prior to a time period set by law, then a tax deed foreclosure proceeding will be initiated, and the lien investor can choose to bid on the property or would be paid off on their lien if another party purchases the property.
Tax deeds are generally issued after the property owner has failed to pay back taxes for a period of time. Title to the property itself is placed up for public auction and the starting bid can be as low as the taxes owed – depending on the jurisdiction. Tax deeds usually have a short redemption period in which the taxpayer may resolve the debt and retain the property from a few days to a few months. If a property is redeemed, the investor will receive penalties and taxes. If the property is not redeemed, the investor may foreclose on the property.
How to invest in tax and Deeds?
The process for investing varies by state and by county. Most liens and deeds are sold at auction, with some auctions taking place in-person at a county courthouse, and some taking place online. You will generally need to register in advance for such auctions and may be required to place a deposit to participate.
Bidding can take place in one of several fashions, such as bidding up the price, bidding down the interest, or by lottery. In some jurisdictions, unsold liens or deeds may be available for sale “over the counter” from the county clerk’s office or website after an auction has been completed.
Prior to participating in an auction, you will want to perform research to identify those properties you may be interested in and ensure there are no complications such as other liens that may need to be settled or problems with the property itself that may create issues if you were to take over ownership.
If you are the successful bidder at auction, you will then need to pay for the lien or deed from your plan account, usually the same day. This may require the issuance of a cashier’s check or wire from your plan account.You will then need to wait out any redemption period as allowed by law. This period is meant to give the property owner an opportunity to settle their debt with the taxing authority. With a lien, redemption means that your IRA or 401(k) will get a payday, with interest and any applicable penalties being paid. When a property is not redeemed, the process will then move to foreclosure.
In Summary
Investing in tax liens and deeds can be a good way to diversify your holdings and create generous return on investment. A checkbook IRA LLC or Solo 401(k) is certainly the superior tool for participating in this fast-moving asset class. If you have an interest in using tax-sheltered retirement funds for such investments, please feel free to contact us. One of our expert advisors will be happy to evaluate your specific situation and goals and provide appropriate guidance. Investor education is our top priority.
Disclosures
As with any investment, there is risk associated with investing in tax liens and deeds. Investors should have the financial experience to gauge and understand the risks, perform the necessary diligence, and properly administer such investments in compliance IRS rules.
Safeguard Advisors, LLC is not an investment advisor or provider, and does not recommend any specific investment. We provide self-directed retirement plan platforms that are properly structured per the tax code to provide you with full control over investment decisions. The information above is educational in nature, and is not intended to be, nor should it be construed as providing tax, legal or investment advice.
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Why Invest in Tax Liens & Deeds?
Tax liens and deeds provide the opportunity for generous return on investment, potentially with lower amounts of capital. While there are certain risk factors, they are relatively low. Tax lien investing is focused on the collection of interest and penalties (where available) for the tax debt. Tax deed investing is aimed at acquiring property at below market cost.
The Advantage of Checkbook Control
This just to check if the switch works or not.When investing in tax liens and deeds, you must ensure that all activities are conducted under the umbrella of your plan. You may not provide benefit to your plan such as by paying a necessary auction deposit with personal funds, for example. All expenses associated with tax lien investing must come from the plan account directly, as all income produced must be deposited to the plan account.
We are often asked if the plan can pay for the account holder to attend a tax lien training class, and recommend against that. Even if your investing activities will be 100% through your plan and not involve any personal investing in tax liens, the IRS could consider this self-dealing.
Investing in tax liens for the interest and penalty income will be considered passive and therefore fully tax sheltered to a self-directed retirement plan. This would also be true of acquiring a property via a tax deed and then holding that property as a rental. If your strategy will involve acquiring properties simply to turn around and resell those properties – with or without rehab – that could be viewed as a dealer activity. If executed on a regular basis, this would expose the IRA or Solo 401(k) to UBIT.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
