Tax Liens vs Note Investing: Honest 2026 Comparison

Frequently Asked Questions

What is the difference between a tax lien and a mortgage note?

A tax lien is the government's claim against a property for unpaid property taxes — it carries super-priority status under state statute and sits ahead of every private lien on the property, including first mortgages. A mortgage note is a private debt instrument: the borrower's written promise to repay a loan, secured by the property via a recorded mortgage or deed of trust. Tax liens are auctioned at the county level when taxes go delinquent; mortgage notes are originated by lenders and traded in a private secondary market. The tax-lien investor and the note investor can hold instruments on the exact same property — the tax lien outranks the note, and a tax-deed sale wipes the note out entirely.

Which states are best for tax-lien investing?

Roughly 30 states sell tax-lien certificates; the rest (including California, Texas, and most of the Western United States) are tax-deed states that auction the property directly. Per the National Tax Lien Association, the largest certificate markets by volume are Florida, New Jersey, Illinois, South Carolina, Colorado, and Arizona. Statutory interest-rate ceilings vary widely: Florida caps at 18% per year under Fla. Stat. § 197.172, Arizona at 16% under A.R.S. Title 42 Chapter 18, and Iowa at 24% (2% per month under Iowa Code § 447.1). Most large auctions are bid-down formats, so the rate awarded is typically well below the statutory cap — Florida and Arizona auctions routinely clear at 1–5% in heavily-trafficked counties.

How long is the redemption period on a tax lien?

Two to three years across the major certificate markets, and the variation is one of the most important factors in pricing a certificate. Florida certificate holders may apply for a tax deed two years after April 1 of the year the certificate was issued (Fla. Stat. § 197.502); the owner may redeem at any point until the tax-deed sale clears. Arizona's redemption window runs three years from the date the lien was first offered for sale under A.R.S. Title 42 Chapter 18. Iowa's general redemption window is two years under Iowa Code Chapters 446–447. During this period, the property owner (and in many states the mortgage lien holder of record) can pay the delinquent amount plus statutory interest and reclaim the property. Missing the deadline as a note holder is the most common way a first-position mortgage gets wiped out in tax foreclosure.

Can a tax lien wipe out my mortgage note?

Yes — and it happens regularly. Property tax liens carry super-priority status under state statute and sit ahead of every private lien on the property regardless of recording date. When the redemption period expires and a tax deed is issued, the new owner takes the property free and clear of all subordinate liens, including first mortgages, second mortgages, judgments, and mechanic's liens. This is not theoretical: a $450 delinquent tax bill can extinguish a $7,000 non-performing loan investment backed by a $33,000 property. The note investor's standard defense is to monitor every asset's tax status, advance the delinquent taxes when necessary, and respond to tax-sale notices as a top priority — covered in detail in our property-tax due-diligence playbook.

How are tax-lien investments taxed?

Tax-lien interest is ordinary income on a 1099-INT — same form as note interest, with no depreciation shelter on either side (IRS Form 1099-INT). If a certificate ripens into a tax deed and you take title to the property, the subsequent sale is a real-estate transaction with its own cost basis and holding-period treatment. Both tax liens and notes drop cleanly into a self-directed IRA with no UBTI exposure on unleveraged positions, where the interest compounds tax-deferred (IRS Publication 598). The K-1 depreciation pass-through that LP syndications and direct rentals enjoy is not available for tax liens or notes — both are interest-income strategies that the IRS treats the same way.

What happened with Tyler v. Hennepin County?

In May 2023, the U.S. Supreme Court ruled unanimously in Tyler v. Hennepin County, 598 U.S. 631 that governments cannot retain surplus equity from a tax foreclosure beyond the tax debt owed without compensating the former property owner. The case involved Geraldine Tyler, whose Minnesota condominium was sold at tax foreclosure for $40,000 to satisfy a $15,000 tax debt, with the county keeping the $25,000 surplus. The Court held that this practice violated the Fifth Amendment's Takings Clause. The ruling has significant implications for tax-lien investing: several states with statutes allowing certificate holders or governments to retain surplus equity (Alabama, Arizona, Colorado, Illinois, Maine, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, South Dakota, and Washington D.C., per Pacific Legal Foundation research) are still adjusting their statutory frameworks in response.

How much capital do I need to start with tax liens versus notes?

Tax-lien certificates routinely clear at $500–$10,000 per parcel, with no accreditation required and no platform fee. Whole performing notes typically start around $15,000 and partial-interest positions can be picked up for $5,000. Tax liens win on minimum check size at the certificate level, but building scale typically means buying many certificates across multiple auctions in a single state — the operational burden is the auction calendar, not the per-certificate capital. Note investors can deploy similar total capital into a smaller number of larger positions with a more predictable acquisition cadence.

Should I hold tax liens and notes together?

Some investors do — and the two strategies sort cleanly to different jobs in the same portfolio. Tax liens deliver statutory-rate exposure at the super-priority position with bursty workflow concentrated at auction and redemption deadlines; notes deliver monthly cash flow at the first-lien position with predictable servicing across all 50 states. The natural pairing is geographic: a note investor with collateral in Florida or Arizona has every reason to learn the local tax-lien process to defend their first-lien positions when borrowers go tax-delinquent, and a tax-lien investor with capital outside their auction window can deploy it into notes addressable nationally. The strategies are not in competition — they live in different parts of the cap stack on the same properties.