County And City Taxes On Tax Liens
First thing I want to say is I have been reading this forum for about two months and I think it is great what you guys are doing here.
Now, I have taken a course on tax lien investing and am interested in land sales here in Alabama. I was planning on starting a LLC in January of 2005 and one question still is bothering me because I cannot find the answer anywhere or I just can't get a clue.
Do you have to pay monthly county and city taxes if you are investing in tax liens?
Let me give you an example of what I been thinking about.
Like I said, I am interested in Land Sales here in Alabama. (That's what they are called) Say the redemption is 6 months away for the state who holds the property and the owner comes and redeems the property. Say I held the lien in my company name and earned a return 6 months later on the tax lein. Since I am not offering a service or a real product and I only make money if someone redeems the certificate or I obtain actual title, would I have to pay county and/or city taxes on that return?
This is getting a little long but, since the company didn't make money for 6 months and you have to file your income for the city and/or county every month, would the state call me and ask why I did not report and income for 6 months? I ask this because I owned a small business right out of high school back in 1999 and since my business was not making any money and I had not made any money, they called and ask why I did not report and income or taxes.
A response would be appreciated, thanks
From what you are posting this sounds like a local situation in your area. When I had a corporation or an unincorporated business, I usually had to pay business license fees once a year to the city. If there is certain retail activity then there may be local sales taxes on products that were sold, however, my recollection is that those taxes never applied to my business. There was responsibility to pay estimated income tax for both State and Federal quarterly but filing was done annually.
In the case of your tax lien business this would be required for you. Is there a local income tax in your area? If so, filing monthly seems punitive. I would think that your best bet on getting information would be to call the people who called you to ask why you did not report income.
[ Edited by edmeyer on Date 09/22/2004 ][ Edited by edmeyer on Date 09/22/2004 ]
Thanks for the reply. Yeah, I knew about filing annually and yearly income taxes. I just did not know if I have to pay local taxes on a monthly bases if I earned any income. But since you mentioned local income tax, I will try to see if we have local income taxes that a business would have to pay. As far as calling those people as you call them, that was over 5 years ago when I held a small business. Again thanks for the reply.
Hey Netscreamer, when you find out some details about this let us know on the board. I recently formed an LLC with the intent of investing in Rental Properties, Tax Lien & Deed in AL. So this info would be interesting to find out how Alabama treats this situation.
By the way, which counties of Alabama are you considering Tax Lien/Deed Investing in? (Montgomery?, Jefferson? Baldwin?)
I was mostly interested in checking out the Jefferson county or Birmingham area since I am closer to that area and they have so many liens for me to do research on. Did you check out the amount of liens in your particular area. I was overwhelmed when the department of revenue sent me a list of all the counties.
I'd think you'd have to pay taxes on any income your business makes throughout the fiscal year. Depending on how your LLC is taxed in your state. Example being your LLC is taxed as an S corp then any money earned should flow straight through the business to you and then taxed at whatever your personal income tax is. If its taxed as a C corp then the money is distributed on a set basis and whatever isn't used for business expenses is then taxed at the business income tax rate then when its distributed it is again taxed at your personal income tax rate. how soon after you incorperate are you planning to make your first purchase?
well if everything goes according to plan, I will make my first bid to the state in January. I appreciate the info on the tax through status of an LLC treated as a S or C corporation. I am planning on having my income taxes passed on to my individual return to start out.
I have also been reading heavily for the past couple of hours and I am pretty sure that here in Alabama since I am not selling any tangible property as of yet, just investing in a tax lien, then I will not have to worry about sales, use and consumer taxes, just but I will still have to file them each month or just pay the minimum for the year which will probably be the case starting out.
[ Edited by netscreamer on Date 09/22/2004 ][ Edited by netscreamer on Date 09/22/2004 ]
I have seen the number of parcels, but be warned it is a long waiting process... I applied for 12-15 parcels that have been sold to state. I applied for them back in April & May of this year; 2 have been redeemed, 2 have been recently offered to me & the rest I am still waiting for an offer from the State.
Have you gotten any legal advice from any real estate atty. about liens and deeds in Alabama?
Quote:
On 2004-09-22 17:44, netscreamer wrote:
I was mostly interested in checking out the Jefferson county or Birmingham area since I am closer to that area and they have so many liens for me to do research on. Did you check out the amount of liens in your particular area. I was overwhelmed when the department of revenue sent me a list of all the counties.
Months??? You're making me think I should start my bidding process now instead of waiting till the beginning of the year. Unfortunately I have yet to talk to a real estate attorney about any liens here but I do already know about the two redemption periods here, which doesn't make anything easier when trying to take possession of any type of land.
I am hoping to get in touch with a family friend who I think is a real estate attorney who can shed some light on real estate here. I am also planning on taking a RE course in the Spring since I am in college.
I have a question for you. What was the price of the two bids that the state offered you? I am just trying to get a good estimate so I can be prepared since the time to respond is so short and I will know if I have enough funds, thanks.
Since this thread is going so well, I also have another question for gmackk. After cruising through all of the counties websites, and reading some of the statues, and some other things, it is clear to me that the state of Alabama makes no warranty on the title of the property. And tax liens do not wipe out the mortgage or other interesting parties on the property. So my question is if you do obtain title to a piece of property and their is a mortgage, what are you going to do?
Well to start my main goal is to generate some passive income for my LLCs, so I will be renting out whenever or if I gain possession of the properties. I mainly focus on properties that have been in the sold to state status for 3 years or more. This way I can be offered a Tax Deed instead of the Certificate of Sale for a lien. But that’s not to say I won’t apply for parcels that have been delinquent for less than 3 years because the 2 that were offered to me have only been delinquent since 2002. Oh yea, they are two condo units in Center Point, AL. and the prices were $653 & $1029. But there is no base price for all parcels, it just depends on the delinquent tax amount for every year it has been delinquent plus interest and other fees. I have applied for a house that has been delinquent since 2000 & has $4700 worth of delinquent taxes on it, but the property has a county assessed market value of $98000! I went to due my due diligence & it is well worth $98000 (more like $130,000 if appraised).
I don’t focus on the annual tax sale that each county holds. I have gone to them and bid on a property and bided with an added overage amount of $5000 only to be outbid by an investor who bided with an overage amount of $15000 the very next bid. Being that I am a new company I just now wait for the scraps that were not bid on at the Tax Sale to be purchased by the State and apply to purchase from them. This way I have less competition from other investors and bidders that are way out of my league at this time. The only disadvantage is a lot of the prime property will get taken at the annual tax sale & you can’t bid over the amount of delinquent taxes to make it a little bit harder for previous owners to redeem.
And my understanding (& I could be wrong) about mortgages on tax properties is that no lien in no State will wipe out a mortgage until the redemption period is over and the property is tax foreclosed on and a deed is awarded. But I have been fortunate because most of the properties I have been interested in have not had mortgages. I give the information to my atty. and in a day or two she tells me that there are no other liens or encumbrances on the property. By the way she is a good friend of my family too, so if you do have a friend who is a lawyer, treat them good because they will be worth their weight in gold in the future.
Well it has been over a month now but I finally had time to find out the answer to my question over a month ago.
Here in Montgomery, AL and I am sure everywhere else in the state you do not have to pay any type of license fees or pay any city, sales, consumer, use, or state taxes (other than income tax as an individual and the business privilege tax if you are a corporation).
All I have to do now is pay for my llc and a few other things and I should be ok. Hopes this helps anyone who needed to know about license and tax issues here in this state.
Thanks for the update!
Have you gotten any other good information from your atty. friend that you could share?
Since the last time we talked on this thread, I received a couple more offers from the State of Alabama. I received an offer for another condo which I passed on and an offer for a huge lot in Pleasant Grove, AL. worth $31,000 per the county, which I think I am going to purchase. This one will be a Tax Deed.
Well actually it wasn't my attorney (that relationship never came about), I just decided to go yesterday and ask for myself instead of wondering all the time and reading this and that. I'm probably going to have to do alot of research on my own instead of spending a lot of my own money.
That was basically all I really needed as far as licenses and taxes were concerned. Bascially you don't need any special licenses to sell property that you own yourself, which I figured out by looking at the statutes, I just need to confirm it with them. Now I am just waiting for my llc paperwork to be confirmed so I can get started doing my homework.
One thing I have found is that if you form an llc or any kind of business you have to pay the business priviledge tax (minimum $100) to the department of revenue (Look on there website) and basically that's it. You just start running your business.
Let me ask you a question gmackk or anyone for that matter. Do you think that $2000-3000 is enough to get started and possibly by a piece of land from the state?
One more thing, I notice that a lot of the property is in your area. Is a lot of that property junk, (I was going to check it out sooner or later) or are some potentially good deals. I was going off the assessed value and a lot of them are not valued as high dollar, though I could be wrong. AV is not neccessarily FMV.
Well doing my due dilligence, Ive come across properties that shows an improvement value per the State of Al. then when I went to check it out it is only a vacant lot. So you can come across some misleading properties. But all in all I have found some gems just sitting there waiting to be found. Just like the lot in Pleasant Grove, AL. has been in the sold to state status since 1999. It is an irregular lot with dimentions of 118.7' x 175.1' x 114.7' x 160.1' and the average homes price in that subdivision is $175,000-$230,000. Homes were built in the early 90's. Lot has a AV of $31,000 but will appraise for much more. This lot was offered to me for a little over $4000.
Concerning the money situation, even though I started my LLC out with $2000, I personally think that will not be enough if you want to see some serious returns. Like I said I started with $2000 but I have capital that I am going to personally extend a loan to my LLC to fund it & then receive payment with interest as a method of withdrawal (tax strategy). But don't let this deter you, I've seen some good properties that have maybe $300-$600 of delinquent taxes you just have to do your research.
If you email me with your email address, I could email you with some info on how to check out how much the delinquent tax amount is total (if you don't already know) to give you a hint on how much you will be looking at for a particular parcel in Jefferson County.
email me at: gmackk @ netzero. net
Remember before you apply any strategies or methods from any website, forum or message board, consult with an attorney or cpa.
This is a pretty interesting little thread you guys have started here. Let me see if I can't shed some more light on it.
Please don't either one of you get your hopes up on making a fortune buying tax deeds in Alabama. Here in Birmingham it's almost impossible to ever get full title to a property. With the right attorney against you, I don't feel you ever would.
I buy foreclosure properties on the courthouse steps. When buying through this method, sometimes I get properties that have a tax lien, or even tax deed, on them. This puts me very familiar with some of the tactics used by "tax lien investors". There's an investor right now that has a tax lien on one of my houses, but since I'm not giving possession or offering to pay him off, there's not a whole lot he can do. I know what he paid for the lien, and I know what I, by law, have to pay him back...He unfortunately right now, is upside down in his investment...This is because he bought the lien from another third-party investor that screwed him on the sales price, but that's another story. I'm simply stating the point that if you ever do go up against a knowledgable property owner, you might risk losing money in the deal. As far as this particular deal goes, I decided to rent the property out. I've made him an offer that is below what he paid for the deed. All I can do now is hope that he needs the money before I ever sell. If he does, I'll pay him, he'll take his loss, I'll take my gain, and we'll part ways. If he doesn't, I'll continue to rent it.
First off if there is a lienholder out there, obviously your lien would supercede them. However, if they have a $20k mortgage on a piece of property and you have a lien for $600, all they'll do is pay you off and charge it back to the borrower. That being said, I have never seen a mortgageholder give up their position to a tax lien or deed. In this scenario you made 12% on your money. If you're fortunate enough to keep your money tied up for one full year, you've made a grand total of $72.00. Congratulations.
Second position is it's almost impossible to get possession to a property. If the landowner does not wish to grant you possession or quit his claim in the property, then what type of marketable title do you truly have? And never, ever build on a piece of vacant land that you've bought through a tax deed without getting a deed from the owner of the property. That is a sure-fire way to lose money.
Now we in Alabama have the ability to place an "over plus" on a piece of property. This brings in the big investors from out of state every year. They bring several million with them and buy up all the best properties. Along with paying the taxes, they place the over-plus on the property also that they can collect 12% interest on. To explain what this is: If taxes on a property are $600, they will pay those and place an extra $3000 or so with it...When the landowner goes to redeem the property they not only have to pay the $600 back plus 12% interest, they also have to pay 12% interest on the $3000 or so that was placed with it. If you really stop and think about this, it's a no-interest loan to the county that they borrow from the investor...The landowner has to pay the interest on it. I am not a fan of this law at all, but it is our law. Until it gets changed, it's what we have to contend with.
Bottom line on this is: If you're trying to make an excellent return on your investment (12%), then this is a great venture. This is providing you can leave your money tied up for an indefinate amount of time. If you think you're going to actually purchase property for a few hundred dollars on an ongoing basis, though, I feel like you're in for an extremely long, uphill battle.
Now, I'm not trying to discourage real estate investing. I have been doing it for 13 years now, and I love it. But some of these courses that tell you that you can put up $500 and buy all the houses you want through tax sales, if this were true, don't you think we'd be doing it already???
Just be careful, ask a lot of questions and work smart. If you do decide to go forth with this area of investing, though, I highly recommend my attorney here in Birmingham. He has tried many cases and taught many courses in the past 30 some-odd years on tax deeds and redemptions. Since I really don't want to put his name out online for all to see, feel free to email me if your interested in his contact info.
Jay Compton
Birmingham, AL
www.quickoffers.com
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