Tax Lien Income Classification

[Justin Provo]

I am interested in investing in tax liens and I'm curious how the revenue from tax liens is reported to the IRS. Are there any IRS documents associated with purchasing tax liens (even if they are redeemed before foreclosure)?

I figure it's a short-term capital gain (if redeemed in less than a year) then the revenue is taxed at my earned income bracket tier. I figure if I have to pay taxes on it at some point anyway and have to pay taxes on it as earned income anyhow (whether I have a private entity for transactions or use my self-directed IRA), then I would rather have the tax lien in a more liquid and accessible entity if the lien go to foreclosure and I acquire the property.

I realize that all of this is subjective and depends on investment and tax reporting strategies, but I'd like to hear from other people's experiences.

[Bruce Lynn]

In my world rare anyone redeems, if they did you would need to self report the income/expenses as capital gains depending on how fast they do it....or how fast you do it.   Texas is a little different probably than where you live...but concept is still the same.   You can always check with your CPA as to how to best document it and account for it.   To me these are about the easiest to document in most cases....Purchase Price+Expenses-Redemption Price.....Record the Purchase Date and the Sale/Redemption date.   I would think in most cases there are few expenses....maybe additional taxes or recording fees, maybe some software fees, maybe some mileage if you are going somewhere to buy them expenses?

I'm sure it is possible somehow, but I think tricky to buy inside SDIRA.   Where I live you typically have to pay cash or cashiers check quickly.   If you are a good negotiator and get lucky maybe you could pay cash and tell the clerk to hand on to the cash while you get your SDIRA provider to cut a cashier check to the clerk and let them refund your cash deposit.  

Probably some smart person here will tell us how they do it, I hope.