How Canadians Can Invest in US Property Taxes

How can Canadians invest in US tax defaulted property and make big profits? Yes. But Canadian citizens have a few extra rules they have to follow. Your success depends on your knowing the rules and doing your homework.

First, you need to know about the US systems for selling tax defaulted property and these auctions. Every US state has different laws for their auctions. Every county has different rules based on the state law. In the US, a county is a political subdivision within the state. Louisiana has parishes instead of counties. For investing purposes, it is the same thing. Counties collect property taxes to fund local government services. Some states collect property taxes, but that is a tiny amount compared to what is collected at the county level.

When a property owner does not pay his property taxes, the county begins a collection process. A series of letters are mailed to the property owner. If the owner still does not pay, the county declares the property to be “tax defaulted property.” A tax defaulted property auction is planned.

Counties hold these auctions because they must collect property taxes to operate. Property tax dollars fund things like roads and bridges, law enforcement, ambulance services and school systems in the US. This is legal. The most recent case to go before the US Supreme Court was Jones v. Flowers. The High Court was divided on the question of proper notice to the homeowner, but all agreed selling property to collect past due property taxes is legal.

Counties hold public auctions because this is the fairest way to collect these past due property taxes. If you have the money to invest and you register for the auction, you can participate. People from all over the world participate in US tax defaulted property auctions.

KNOW THE AUCTION

You have to know the auction. The US holds two different kinds of tax defaulted property auctions. Anyone can invest in US property taxes in one of these two ways.

The tax lien auction sells the property taxes. If you buy a tax lien certificate, you are buying the past due taxes. To keep his house, the homeowner has to pay back the amount you spent at auction plus interest. “In Arizona, tax lien certificates pay 16 percent, while in Illinois they pay 36 percent, 24 percent in Iowa and in Georgia they pay 20 percent if the taxes are paid off during the first year, and then in subsequent years the interest goes up to as high as 50 percent, depending on how long it takes the taxpayer to pay off the taxes owed,” says an article at US News & World Report news magazine.

If the homeowner does not pay off the taxes, you can foreclose and own the property. More than 95 percent of tax liens are paid.

The other auction is a tax deed auction. If you invest in a tax deed auction, you are buying the property. Once the property goes to auction and is deeded to a new owner, the former owner, who had not paid his taxes, does not have a chance to pay the past due taxes anymore.

Some states offer a hybrid auction, combining elements of both. You can research each state’s auction process at my website, Members.TedThomas.com.

KNOW THE RULES

Every state in the US and the District of Columbia (DC) hold tax defaulted property auctions. DC is the capital enclave in the United States and is not part of any state. For tax defaulted property investing, treat it like a county. Every state has a different set of laws for these auctions. You can get a complete list of local rules from the county tax office where you want to invest.

Here is an example: California sells tax deeds. Orange County holds in-person auctions. You have to be at the auction or have someone represent you. That may not be practical for someone in Canada. Fortunately, many California counties have online auctions. You can be anywhere in the world with an Internet connection and you can bid.

Every online auction is different. Lassen County, CA, contracts with Bid 4 Assets to conduct the auction. Registration requires a refundable $250 deposit and a $35 processing fee. Yolo County, CA, requires a $5,000 deposit and the $35 processing fee. If you do not buy anything at the auction, you get your deposit back.

KNOW THE PROPERTY

Bidding in a tax defaulted property auction is just like buying real estate. You need to know as much about the property as you can. You can get some information from the county tax office. You can get more information from the real estate information website Zillow.com. My website, Members.TedThomas.com, has videos that teach you everything you need to know about using Zillow.

You also need to know about other past due property taxes from other tax collecting boards in that county. In the United States, a county, city and school district can collect property taxes. If the county holds a tax defaulted property auction, that may not settle all past due taxes for a city or school system. The county tax office can tell you whom to call to find out about other taxes. You need to include this in what you plan to spend.

EXCHANGE RATE

The exchange rate of US dollars to Canadian dollars varies every day by slight amounts. Regardless of the rate, you are bidding in US dollars. At the time of this writing that means you are spending more in Canadian dollars than the amount of your bid.

For example only, the exchange rate is $1 US to $1.30 Canadian. If you bid $10,000 US, then you are actually bidding $13,000 Canadian. When you convert to US dollars, you will likely pay a small conversion fee as well.

YOUR TAXES

Since you are investing in the US, you have to pay attention to your taxes and how to pay them in the United States. To start, you will need an individual taxpayer identification number (ITIN). You get this from the Internal Revenue Service (IRS), the federal government’s tax collection agency. Form W-7 is a free download from the IRS website. This website also has additional tax information for Canadians investing in the US.

You also need to know about your tax liabilities in Canada. A financial information and investment website, The Investors Group, discusses this in Look before you leap – Taxing issues of owning U.S. property.

TREAT IT LIKE PROPERTY

If you plan to invest in US tax defaulted property auctions, you need to treat it like property, even if it is just a tax lien certificate. There is a small chance you will end up owning the property. The Canadian tax firm AG Tax says you have four major options for owning real estate in the US. “You can purchase the property personally, set up a limited liability company or partnership, or set up a cross-border trust to hold the title to the property. Each may have a particular advantage depending on an individual’s particular circumstance,” says the article How to buy US Property.

Which is best? That depends on your plans and your investment strategy. Talk to an accountant who has experience managing US investments. How Canadians can invest in US property taxes is simple with the right business structure and understanding the rules of this easy to learn investment.

Ted Thomas is a Florida-based author and publisher who specializes in tax defaulted properties. Visitors to his website www.tedthomas.com will find 4 must see FREE instructional videos. No credit card required. The video lessons will give you everything you ever wanted to learn about government tax defaulted real estate which is sold at public auctions for starting bid, back taxes for 10 cents to 20 cents on the dollar. You’ll also learn the secrets of tax lien certificates which pay guaranteed returns of 16%, 18%, up to 36%. Go to www.tedthomas.com for more information.