Mistake#1: Doing your due diligence too soon before the tax sale.

New investors are always eager to get started. They frequently want to start researching the tax sale properties right away, as soon as they can get the tax sale list. I also made this mistake when I first started; until I realized that I was wasting my time doing due diligence on properties that were never going to be sold at the tax sale. People can pay their taxes and remove their property from the tax sale list, sometime up until right before the tax sale. In my experience, at least half of the properties that are on the original tax sale list will not be there on the day of the sale. So if you start your due diligence early, many of the properties that you research will not be sold at the tax sale and you’ll be wasting your time. I’ve learned to wait until a few days before the tax sale and get an updated list from the tax collector, so that I’m only doing due diligence on the properties that are still on the list a couple of days before the tax sale. Of course if you’re going to a very large sale, you might need a week to do your due diligence, but you shouldn’t need longer than that.

Mistake #2: Not doing due diligence on tax sale properties.

For tax liens this may be as simple as looking at the assessment information on the property and driving by the property to take a look at it. I myself have made the error of bidding on a tax lien on the assessment information alone and not actually looking at the property. Last time I did this, I wound up with a shack that was falling apart, and it was right next to a stream. It looked like if the stream flooded it would be washed away. Because everything around it was overgrown and it was hard to see from the road, I had a real hard time finding it. But the problem was I didn’t go look at it until after I had bought the lien. I should have looked at it before I bid.

Mistake #3: Not knowing the rules of the tax sale.

Since every state, and in some states each county, has different rules regarding their tax sales, you need to know what they are ahead of time. I got an e-mail from a subscriber who had purchased a tax deed at an “upset” tax sale in Pennsylvania. Later he found out that there was a $200,000 mortgage on the property that he was responsible for. He didn’t do his due diligence on the property, so he didn’t know about the lien. He thought that he was buying a deed to vacant land and he didn’t know that a new home had been built on the property, and that there was a mortgage on it. So his first mistake was not doing the proper due diligence for a tax deed property.

But he also didn’t know that when you purchase a deed in the upset sale you are responsible for any liens or judgments on the property. Many counties in Pennsylvania have two different tax sales. The upset tax sale is held in the fall and the properties in that sale are sold subject to any liens or judgments on the property. Then if a property is not sold in this sale it goes to the judicial sale in the spring. The properties in the judicial sale are sold free and clear of any liens or judgments, so there is a big difference between purchasing a tax deed in the upset sale and purchasing a tax deed in the judicial sale. Know the rules of the tax sale that you are bidding at!

Mistake #4: Not knowing what you are bidding at the sale.

I was at a tax sale in New Jersey where a new investor was bidding on some small utility liens. In NJ the interest rate is bid down and then premium is bid on tax liens. She bid large premium (a few hundred dollars) on a small sewer lien, which she won. When I talked to her after the sale, I realized that she did not understand how premiums in NJ work. You do not get any interest on the premium or on the certificate amount. She was not aware that she was not going to get any interest on the amount that she bid at the sale.

The reason that other investors were bidding big premiums on larger liens is because once they have the lien, they can pay the subsequent taxes and get the maximum   rate (18%) on their subs. With small sewer liens, like the one that she got, the subsequent taxes that you get to pay are small, usually no more than $500 per year and you only get 8% on the first $1500. Although she didn’t loose any money, she was going to make very little on this tax lien!

Mistake #5: Not starting foreclosure at the right time.

In some states you are only given a certain time frame where you have to foreclose the lien if it does not redeem, or you loose your investment. If you don’t start the foreclosure proceedings as soon as the redemption period is over, you could loose your lien. But in other states, where you don’t have to foreclose right away, you are better off letting your lien go longer for 2 reasons. The first reason is that 99% of the time, when you start the foreclosure process the lien will redeem. The second reason is that the longer you hold the lien and pay the subsequent taxes, the more money you will make. Of course this only works in states were you could pay the subsequent taxes and get interest on your subs.

1. Tax on property purchases (similar to UK stamp duty land tax). After over 20 years in the tax advice business, there are few things which still surprise me. One thing which does still amaze me is just how often people still seem to overlook the fact that the UK is not the only country in the world with taxes. Anyone who invests abroad has a potential exposure to overseas property tax. Wherever you buy, you will face overseas property tax. Foreign property taxes generally fall into five categories; tax on property purchases; annual charges; tax on income; tax on property sales; tax on death or gifts. It is interesting to note that all but one of these categories are likely to apply to a foreign holiday home owned by a UK resident and if the property is ever rented out, all five will apply. This just goes to show that, when it comes to foreign property tax, the investor and the holiday home owner have more in common than you might expect. Many countries impose a tax charge of some kind when property is purchased, usually based on the purchase consideration paid.

2. Annual charges (comparable to UK council tax).These come in many different forms and are often charged by local or regional governments. There may be an annual charge on property ownership on either a flat rate or linked to the property value. Additional charges sometimes apply to properties which are not the owner’s main residence. There may also, or alternatively, be an annual charge on property occupation – either at a flat rate or linked to the property’s value. Another common annual charge is a wealth tax. Many countries impose this charge on non-residents based on the net value of the property and other assets which they hold in the country. Where a UK resident suffers annual charges on occupation or ownership, these may usually be treated as running costs and can be deducted as an expense from rental income or trading profits for UK tax purposes. Such costs are only partly deductible where there is some personal use of the property. The treatment of wealth taxes is less clear. These are often regarded as a personal cost with no deduction available in the UK.

3. Tax on income (similar to UK income tax). Most countries will tax profits and income derived from property whether through letting, development or dealing. Rental income may either be taxed on an accounts basis, based on profits after certain deductible expenses, or as a flat rate on rent received. Where an accounts basis applies, each country will have its own rules regarding what expenses are deductible. Flat rate systems allow for little or no deduction of expenses. In many cases, the tax on non-resident landlords is a simple flat percentage of rent received and may have to be withheld at source (i.e. a withholding tax). Reduced rates of withholding tax often apply under double taxation agreements and must be claimed where available. Profits from property development and dealing are usually taxed on an accounts basis and sometimes also attract additional social taxes like the UK’s national insurance. For UK tax purposes, double tax relief is usually available for overseas property tax on property income or they may be claimed as a business expense.

4. Tax on property sales (comparable to UK capital gains tax). Having spent more than 20 years in the tax advice business and having dealt with many overseas property tax authorities, another thing which does still amaze me regularly is how often people seem to think that they can sell a property abroad and not face a tax liability on it. Wherever you sell, you can expect to face up to foreign property tax. Some countries charge tax on the gain arising when a property is sold. Many countries do provide an exemption for the owner’s main private residence although you will find that this is not generally available to non-residents. Properties held for longer periods are also often exempt. Many countries, like the UK, will treat profits derived from property sales by developers and dealers as income. Double tax relief for overseas property tax suffered on capital gains is usually available against UK capital gains tax. Tax on property sales is often overlooked by UK investors, and they do so to their cost.

5. Tax on death or gifts (similar to UK inheritance tax). Many countries do not have any death taxes but just as many which do. Generally, where there is a death tax, there will usually be a similar tax on lifetime gifts as an anti-avoidance measure. Most countries with a death tax will charge it on non-residents in respect of property and other assets within their borders. Double tax relief for foreign death taxes is available against any UK inheritance tax liability arising on the same assets. Double tax relief will also be available for foreign tax gifts if the same gift gives rises to a UK inheritance tax liability although this will be rare unless trusts are involved. Wealth warning: do not assume that there will be an exemption from foreign death or gift taxes in respect of transfers to your spouse or civil partner. This will not always be the case. Furthermore, it is crucial to be aware that foreign gift taxes may apply to lifetime transfers of property or shares in property (e.g. putting a foreign property into joint ownership with your spouse).

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