Tax Lien Certificate

[Roberts]

Client is not in the real estate industry.

They purchased a Tax Lien Certificate and has just a few days before the property owner must pay the tax bill due OR forfeit the property. Client hasn't heard anything from the owner / ignored all correspondence attempts. They believe they will be taking control of the property in a few days and when they sell, will have a profit.

I've never dealt with one of these previously, would this be considered a capital gain?
I'm comparing it to an investor who flips houses - that's routinely considered a capital gain.

[Snaggletooth]

I think so

I believe this is capital property for investment purposes and qualifies for capital gain treatment upon sale.

The only reservation is if person buys several of these for "back taxes" and at some point this would become business income instead of capital gain income. But you have indicated this person is not in the real estate business...

On a related note, I drove through Detroit a couple weeks ago, obviously in the daytime with a good car and locked doors. If that place ever latches on to a new economy, real estate developers will move in like vultures. I don't know how many properties can be purchased simply for property taxes, many of which such taxes now exceed the market value of the home. Most homes in Detroit can be bought for $5-$10K, and in many cases vacant lots for only a few hundred dollars. It appears in the residential areas, half the area is vacant lots.

[ATSMAN]

Client is not in the real estate industry.

They purchased a Tax Lien Certificate and has just a few days before the property owner must pay the tax bill due OR forfeit the property. Client hasn't heard anything from the owner / ignored all correspondence attempts. They believe they will be taking control of the property in a few days and when they sell, will have a profit.

I've never dealt with one of these previously, would this be considered a capital gain?
I'm comparing it to an investor who flips houses - that's routinely considered a capital gain.

It is not that simple to take possession of the property and then resell it. It must go through foreclosure process and then the occupants have to be evicted. One of my clients bid on a tax lien certificate and won. When he went inside the property the owners had removed all the fixtures and the cost to get it back to a point of resell was a total loss.

[JohnH]

I believe this is capital property for investment purposes and qualifies for capital gain treatment upon sale.

The only reservation is if person buys several of these for "back taxes" and at some point this would become business income instead of capital gain income. But you have indicated this person is not in the real estate business...

On a related note, I drove through Detroit a couple weeks ago, obviously in the daytime with a good car and locked doors. If that place ever latches on to a new economy, real estate developers will move in like vultures. I don't know how many properties can be purchased simply for property taxes, many of which such taxes now exceed the market value of the home. Most homes in Detroit can be bought for $5-$10K, and in many cases vacant lots for only a few hundred dollars. It appears in the residential areas, half the area is vacant lots.

Wouldn't that be "The City Formerly Known as Detroit"?

[Roberts]

On a related note, I drove through Detroit a couple weeks ago, obviously in the daytime with a good car and locked doors. If that place ever latches on to a new economy, real estate developers will move in like vultures. I don't know how many properties can be purchased simply for property taxes, many of which such taxes now exceed the market value of the home. Most homes in Detroit can be bought for $5-$10K, and in many cases vacant lots for only a few hundred dollars. It appears in the residential areas, half the area is vacant lots.

As long as the environment is filthy, schools stink, jobs are distant, grocery stores are dangerous and substandard and dangerous people live in the area - nobody is going to make money reinvesting in the area. Detroit has over 60 Superfund sites.

The sad reality is that the University of Michigan is a terrific school but it is 45 miles from Detroit. The only cities that will rebuild are cities with excellent universities in their core to rebuild around and attract corporate investment and premier builders of new industry. Look at Pittsburgh, with Pitt and CMU - they are in terrific shape long term.