Property Tax Lien Certificates

[sea-tax]

Hello All, I am looking for some information on Tax Lien Certificates. I have a client who is going to start purchasing this tax lien certs. The premises is that some county's and states allow for individuals to purchase these lien certs and then the purchaser is responsible for collecting the property tax as well as the 18% interest and it actually can be higher.

My question is how would you all suggest to handle this on my clients return. Investment income and Investment expenses or as a business?
Or is there another way to report this?

Initially I would like to withhold what I am leaning for , and like to hear what all you have to suggest.
Thanks to all !

[DaveO]

I have had only had a few of these.

I treated the interest received by the purchaser as interest income. The money paid for the certificate (the back taxes) I treated as capital. If the property owner redeemed his certificate at cost it would cause no gain or loss. If the puchaser took possesion of the property I counted it as part of the purchase price.

[George Boutwell]

Must have gone to a seminar

When the certificate is redeemed (and this happens more than 99% of the time) the county will issue the investor a 1099-INT, and the amount is reported on Schedule B. In the rare case where the property is foreclosed, the certificate cost and the foreclosure expenses (court costs and attorney fees) are included in the basis of the property. It will probably take more than a year to sell it, because it's a ten-foot strip in the middle of nowhere, so the investor will probably want to report the gain on Schedule D.

Mileage to the next county to attend its certificate auction may be a reasonable investment expense, deductible on Schedule A. Travel to Florida to buy certificates there, probably is not.

I have a family member who dabbles in these. Given a choice between a hard way to make money and an easy way, he'll choose the difficult method every time. Part of it is guilt about making money without effort, and part of it is a belief that he has found a royal road to riches that is unknown except to the others who attended the seminars offered by those who have discovered the easy way to make money in the seminar and publications business.

He had a few thousand dollars tied up in a property whose owner filed bankruptcy. He eventually got the money back, but the interest allowed by the bankruptcy court was not what was expected. The seminars usually don't cover the risks of bankruptcy.

[sea-tax]

"Mileage to the next county to attend its certificate auction may be a reasonable investment expense, deductible on Schedule A. Travel to Florida to buy certificates there, probably is not. "

Well thanks for the info. This is how I suspected it would be treated. Sch b for the interest and sch d for any gain or loss.
Question George" why would the travel expenses to Florida or any other state for the sole purpose of this investment not be deductible"?

Also would you take the deductions on the sch a or capitalize them and take them as additional basis on sch d.?

Anyone else want to way in for me?
Thanks to all again.

[Zee]

"Mileage to the next county to attend its certificate auction may be a reasonable investment expense, deductible on Schedule A. Travel to Florida to buy certificates there, probably is not. "

Well thanks for the info. This is how I suspected it would be treated. Sch b for the interest and sch d for any gain or loss.
Question George" why would the travel expenses to Florida or any other state for the sole purpose of this investment not be deductible"?

Also would you take the deductions on the sch a or capitalize them and take them as additional basis on sch d.?

Anyone else want to way in for me?
Thanks to all again.

I don't think the mileage would be deductible in either situation unless the taxpayer is in the business of buying & selling tax certificates. Mileage to a broker's office to buy securities isn't deductible, is it?

[sea-tax]

I don't think the mileage would be deductible in either situation unless the taxpayer is in the business of buying & selling tax certificates. Mileage to a broker's office to buy securities isn't deductible, is it?

Well not so fast. On the TTb page 4-26 is does not include travel expenses as a topic for includable investment expenses. However in the OF on page 5-20 under investment expenses it specifically says " Certain investment related travel costs".
Now I am not implying that one is more correct or less. Infact I am not even sure where I personally stand as I have not completely finished all my research on this topic or the other which I origianlly asked about.

So far it seems reasonable to include the interest on Sch B and the difference between what the Lien is for and what my client paid for it as a Capital Gain/loss. Also including the cost associated in getting the money as a adjustment to cost basis.

Anyone else agree or disagree?

[Zee]

Well not so fast. On the TTb page 4-26 is does not include travel expenses as a topic for includable investment expenses. However in the OF on page 5-20 under investment expenses it specifically says " Certain investment related travel costs".
Now I am not implying that one is more correct or less. Infact I am not even sure where I personally stand as I have not completely finished all my research on this topic or the other which I origianlly asked about.

So far it seems reasonable to include the interest on Sch B and the difference between what the Lien is for and what my client paid for it as a Capital Gain/loss. Also including the cost associated in getting the money as a adjustment to cost basis.

Anyone else agree or disagree?

No other replies, yet? I would agree travel costs to look after investments may be deductible as a 2% deduction. I'm not so sure about travel to the courthouse to "purchase" tax liens. I do hope someone else offers an opinion.

[George Boutwell]

Well, I'm sorry I mentioned it

Travel and transportation for investment purposes is deductible on Schedule A, subject to the 2% backout, if it is reasonable and necessary.

A trip to your stockbrokers' local office to buy stocks is generally not necessary, because you can call them up. A trip to their office to open an account could be. A trip to a stockbroker 2,000 miles away might be reasonable and necessary, if you have ten million dollars and they have a track record of 20% annual returns on managed accounts.

A trip to your tax practitioner might be deductible, although I'm not sure many of us who insist on an occasional face-to-face meeting with clients add in $10 or $20 mileage to what they paid us in fees. Maybe we should. I do have clients who send me the documents I need to prepare their returns, and who want to deduct the $10 or $20 they paid the Post Office or FedEx, and I include that in their deduction for tax return preparation.

The point of my original comment was that if you live in International Falls and you need to drive down to the Koochiching County Courthouse to buy some tax certificates, that trip would be deductible (except, perhaps, if the auction and transaction can be completed online). But if you live in International Falls and spend a week in Miami Beach in February for their certificate sale, that would not be deductible, unless you bought a whole lot of them and could show that the yields in Florida were much higher than those available closer to home.