Tax Lien Investing Risks: 12 Ways Investors Actually Lose Money
Tax lien investing is often sold as safe: the lien outranks the mortgage, the rate is set by law, and if the owner never pays you get the property. Each of those statements is true somewhere and misleading almost everywhere. A property tax lien does generally rank ahead of the mortgage — Arizona's attaches on January 1 and is "prior and superior to all other liens and encumbrances" except state liens and other years' taxes (A.R.S. § 42-17153). But the rate is a ceiling that bidding cuts, the property that comes to you is the one nobody wanted, and between the two there are deadlines, lawsuits and fees.
Below are twelve ways investors lose money, grouped by when they happen, each with the rule that causes it and what you can do about it. Nothing here is a reason not to invest. It is the list of things to price in before you do.
| # | Risk | Where it bites | How to limit it |
|---|---|---|---|
| 1 | Rate bid to almost nothing | Florida, Arizona, Illinois, New Jersey | Know the minimums (Florida pays 5% on any bid above 0%) and set a floor rate before the sale |
| 2 | Premium or overbid not repaid | Colorado, New Jersey, Missouri, Indiana | Count the premium as a cost; skip liens where it exceeds a year of interest |
| 3 | Worthless parcel that never redeems | Everywhere | Look at every parcel on the county map and imagery before bidding |
| 4 | Sale voided or rescinded | South Carolina, California, Montana and others | Read what the county refunds, and whether it pays interest |
| 5 | Owner files for bankruptcy | Everywhere (federal law) | Expect delay; track statutory deadlines that stop running during a stay |
| 6 | Certificate expires | Florida, Arizona, Colorado, Iowa, Missouri | Diary every deadline on the day you buy; keep your address current |
| 7 | Pushed out by the next year's buyer | Arizona, New Jersey | Budget for later taxes from the start |
| 8 | Notice defect voids the deed | Everywhere (due process) | Follow the notice statute exactly; search for every interested party |
| 9 | Liens that survive the sale | IRS everywhere; upset sales in Pennsylvania; others | Title search before bidding on a deed |
| 10 | Title nobody will insure | Most deed states | Plan for a challenge period or a quiet title action |
| 11 | Liability for the property | Rhode Island, New Mexico, any owner | Inspect; price in repairs, code violations and occupants |
| 12 | Money locked up for years | Everywhere | Invest only cash you will not need for the full redemption period |
At the auction
1. Bidding the return away
The statutory rate is a maximum. In bid-down states the auction decides what you earn: Florida starts at 18% and accepts bids in quarter points down to zero (Fla. Stat. § 197.432(6)), Arizona starts at 16% (A.R.S. § 42-18053), Illinois bids a penalty per six-month period (35 ILCS 200/21-355). In competitive counties rates end up in single digits or below. Florida softens it with a 5% minimum on any certificate bid above zero, but a certificate bid at exactly 0% earns nothing (§ 197.472(2)). The rate table for every state shows which states bid the rate and which fix it.
2. Paying a premium you will not get back
Where the rate is fixed, bidders pay more than the debt. Colorado keeps the premium and never repays it; New Jersey returns it without interest and keeps it after five years; Missouri pays its 10% only on the taxes and costs, never on the overbid (C.R.S. 39-12-103; N.J.S.A. 54:5-33; RSMo § 140.340.2). A Colorado lien redeemed after six months at 13% earns 6.5%, so any premium above that is a guaranteed loss on a quick redemption. Our guide to what a tax lien really costs works through the arithmetic.
3. Buying the parcel nobody else would
Most liens redeem. Charleston County, South Carolina says about 80% of its sales are redeemed; Eagle County, Colorado says fewer than 1% of its liens go to deed (Charleston, Eagle). The ones that do not redeem are disproportionately the strips of land too narrow to build on, landlocked lots, flood-prone ground, condemned buildings and parcels with a lien worth more than the land. The owner stops paying because the property is not worth paying for. A high rate on such a parcel is not a bargain. Look at every parcel on the county GIS map and imagery before you bid; our guide to finding and researching tax sale properties has the checklist.
While you hold the lien
4. The sale is voided
Counties void sales for errors, payments that were missed, bankruptcy filings and properties that should never have been listed. Charleston County says about 10% of its sales are voided before the deed. What you get back varies. In Montana, if a court voids the lien for an irregularity, the county refunds your money with interest at the delinquency rate (Mont. Code Ann. § 15-17-326(1)). In Los Angeles County, a rescinded deed sale is refunded with interest at the county pool rate. Elsewhere you may get the price back without interest, months later. Read the county's terms for "sale in error" before you buy.
5. The owner files for bankruptcy
A bankruptcy filing triggers the automatic stay. It stops any act to obtain possession of property of the estate, to enforce a lien against it, or to collect a claim that arose before the case (11 U.S.C. § 362(a)(3)–(6)). As a certificate holder you cannot apply for a deed or foreclose while it lasts, and a plan can stretch repayment over years. Where the Bankruptcy Code requires interest on a tax claim, the rate is the one set by nonbankruptcy law (11 U.S.C. § 511), but timing and the treatment of a certificate in a plan depend on the court. Some states protect your deadlines: Arizona moves a certificate's expiry to twelve months after a stay ends (A.R.S. § 42-18127(C)), and New Jersey extends its five-year premium period by each day a bankruptcy blocks foreclosure (N.J.S.A. 54:5-33(a)). Several Colorado counties will not let you pay later taxes on a parcel in bankruptcy.
6. The certificate expires
Certificates do not last forever, and in many states doing nothing is the most expensive choice:
- Florida: void seven years after issue if no deed application has been made (§ 197.482).
- Arizona: void ten years after the last day of the month it was acquired if you have not sued to foreclose; the treasurer's warning goes to the address on file (A.R.S. § 42-18127).
- Colorado: certificates issued from 2026 stop being a lien seven years after issue unless a deed application is pending (C.R.S. 39-11-148).
- Iowa: the sale is cancelled if no affidavit of service is filed within three years (Iowa Code § 446.37).
- Missouri: the holder has eighteen months from the sale to have a deed executed and recorded (RSMo § 140.410).
7. Being pushed out by next year's buyer
If you skip the later taxes, someone else may buy them, and in some states that buyer takes your place. In Arizona the treasurer can require the buyer of a later year's lien to take your certificate by assignment, which pays you off and ends your position (A.R.S. § 42-18121.01). In New Jersey a later certificate is paramount to yours, so its holder can foreclose you out. Keep cash for one or two years of later taxes on every lien you buy.
Going to deed
Before you count on a deed, run the state through the tax lien calculator: it shows what that state's statute requires after an unredeemed lien (deed application, lawsuit or public auction) and what is left of the profit once title work, holding and selling costs come out.
8. A notice defect voids the deed
Taking someone's property for taxes requires notice that satisfies due process. The U.S. Supreme Court held in Mennonite Board of Missions v. Adams, 462 U.S. 791 (1983) that a mortgagee whose name and address are reasonably ascertainable is entitled to notice by mail or other means as certain, not just publication. In Jones v. Flowers, 547 U.S. 220 (2006) it held that when a certified letter comes back unclaimed, the state must take further reasonable steps if any are available. A deed issued after defective notice can be set aside, sometimes years later, after you have paid for repairs or resold. Where the holder serves the notice — Iowa's notice of expiration, Georgia's barment notice — the risk is yours. Search the records for every owner, heir, lienholder and occupant, and follow the statute word for word.
9. Liens that survive the sale
A tax deed does not always wipe the slate clean:
- Federal tax liens: the IRS can redeem real property sold to satisfy a prior lien within 120 days of the sale, and a federal lien filed more than 30 days before a nonjudicial sale survives unless the IRS was notified at least 25 days before it (26 U.S.C. § 7425).
- Pennsylvania upset sales: the buyer takes the property subject to its mortgages and liens; only a court-ordered judicial sale sells it free and clear (Pennsylvania page).
- Oklahoma: a resale deed is subject to the state's claims for taxes and other liens (68 O.S. § 3131(A)).
- Arkansas: city liens, improvement district taxes and IRS liens can survive a Commissioner of State Lands sale (Arkansas page).
10. A title nobody will insure
Until the period to challenge a tax deed has passed, most title insurers will not insure it without a court judgment. That period is one year from the recording of the deed in Texas, two for a homestead or agricultural land (Tex. Tax Code § 33.54); two years in Nevada (NRS 361.600) and Oregon (ORS 312.230); four years in Florida once the deed has issued (Fla. Stat. § 95.192) and in Utah (Utah Code § 78B-2-205). Los Angeles County says most insurers wait at least a year after its deeds are recorded. Without insurance you cannot easily sell to a buyer with a mortgage or borrow against the property. The way through is a quiet title action, which costs time and legal fees.
Owning the property
11. Liability that comes with the land
Once the property is yours, so are its problems: code violations, unsafe buildings, contamination, and the people living in it. Some states make this explicit. In Rhode Island the tax title holder is shielded from environmental and minimum-housing violations for the first year, but after that becomes jointly and severally liable with the owner for complying with laws on use, occupancy and maintenance, even before redemption is foreclosed (R.I. Gen. Laws § 44-9-12). New Mexico's state-run sales require every winning bidder to indemnify and defend the department, permanently, against environmental claims connected with the property. Counties rarely deliver possession: Rogers County, Oklahoma and Riley County, Kansas both tell buyers that removing occupants is their job. Price in demolition orders too: Ingham County, Michigan requires a performance bond where one applies.
12. Money locked up for years
A lien is not a bond you can sell next week. Iowa's holder cannot serve notice until one year and nine months after the sale (Iowa Code § 447.9); Arizona's cannot sue until three years after it (A.R.S. § 42-18201); Alabama's lien-county holders wait at least four years before they can go to court (Code of Ala. § 40-10-197). If the owner redeems early, you earn a few months of interest on money you had set aside for years. If they never redeem, you need more money, not less, to reach the deed. Invest only cash you will not need for the full redemption period.
Red flags outside the statute
Some losses have nothing to do with the law. Lists sold online can be last year's, or include parcels the county already withdrew: Davidson County, Tennessee cancelled its November and December 2026 sales, and a list printed weeks earlier would not show it. Courses and services that promise "guaranteed" returns or "foreclosure-free" profits are describing something no statute provides. And former owners are a target of their own: if a sale produced surplus, they can usually claim it free from the county — see how to claim tax sale overages.
Frequently asked questions
Can you lose money on a tax lien?
Yes. The lien itself is secured, but you can lose money through a premium that is never repaid (Colorado), a rate bid to zero (Florida pays nothing on a 0% certificate), a certificate that expires before you act, a parcel worth less than what you paid to take it to deed, or a deed voided for a notice defect. Most losses come from these, not from the owner failing to pay.
What happens to my tax lien if the owner files bankruptcy?
The bankruptcy filing triggers the automatic stay, which stops acts to enforce a lien against property of the estate or to collect a pre-bankruptcy claim (11 U.S.C. § 362(a)(4)–(6)). You cannot apply for a deed or foreclose while it lasts. Where interest on a tax claim is paid under the Bankruptcy Code, the rate is the one set by nonbankruptcy law (11 U.S.C. § 511). Some states stretch their own deadlines to match: Arizona moves the certificate's expiry to twelve months after a stay ends (A.R.S. § 42-18127(C)).
What percentage of tax liens get redeemed?
Few counties publish it. Charleston County, South Carolina says about 80% of its tax sales are redeemed and about 10% are voided. Eagle County, Colorado says fewer than 1% of its liens ever go to deed. That is why a lien is mainly an interest investment, and why the parcels that do not redeem deserve suspicion.
Is tax lien investing safe?
It is lower-risk than many property investments because the lien usually ranks ahead of the mortgage, but it is not guaranteed. No statute guarantees a return or a property. Returns are capped by law and cut by bidding, and the risks in this guide are the ways investors actually lose money.
Can a tax deed be taken back from the buyer?
Yes, within limits. A deed can be voided if the notice was defective, and many states give a set period to challenge it: one year in Texas (two for a homestead or agricultural land), two years in Nevada and Oregon, four years in Florida and Utah. In California anyone may ask to rescind a sale within one year of the deed.
Sources
- 11 U.S.C. § 362 and § 511; 26 U.S.C. § 7425 (read 16/10/2026)
- Mennonite Board of Missions v. Adams, 462 U.S. 791 (1983); Jones v. Flowers, 547 U.S. 220 (2006)
- Fla. Stat. ch. 197 (§§ 197.432, 197.472, 197.482); § 95.192
- A.R.S. §§ 42-17153, 42-18053, 42-18121.01, 42-18127, 42-18201
- C.R.S. 39-11-148, 39-12-103; N.J.S.A. 54:5-33; RSMo §§ 140.340, 140.410; Iowa Code §§ 446.37, 447.9; 35 ILCS 200/21-355; Code of Ala. § 40-10-197
- Tex. Tax Code § 33.54; NRS 361.600; ORS 312.230; Utah Code § 78B-2-205; 68 O.S. § 3131; Mont. Code Ann. § 15-17-326; R.I. Gen. Laws § 44-9-12
- County pages: Charleston County Delinquent Tax; Eagle County Treasurer; Los Angeles County TTC
State-level details, each with its own sources, are on the state pages. Before you choose where to invest, compare the systems in tax lien vs. tax deed states.
This article is general information, not financial or legal advice. Statutes, county practice and court decisions change; confirm the rules for your county with the official source, and consult a licensed attorney about bankruptcy, notice and title questions.