Tax equity investments have a few different interpretations, specifically at the federal and state level. Federal tax equity options include liens on an individual’s property for unpaid taxes, fees, or other charges. Federal investments also include new federally funded infrastructure items, often in the energy industry. State tax equity investments include tax liens placed on real estate, both personal and commercial. These liens exist due to unpaid property taxes assessed by state and local governments.
The federal government has an intense and lengthy tax code, which it applies to numerous income and property transactions. Individuals who fail to pay these taxes can become subject to tax liens on any property on which a tax remains unpaid. In most cases, a delinquent taxpayer must go a long way in order to have a lien assessed on his or her personal property. Common property placed under liens have physical representation, such as inventory, cars, or similar items. Cash does not typically fall under federal tax liens or tax equity investments.
Federal governments may also offer individuals and companies an opportunity to purchase infrastructure tax equity investments. Capital goes into major projects that benefit several individuals once complete. For example, the energy industry is a common focus of tax equity investments. Private companies often work in tandem with government agencies to create wind farms, coal plants, or other energy sources. Individuals can purchase an investment in these projects with the hopes of earning an expected rate of return.
State and local opportunities are also available for tax equity investments. These relate to delinquent or rundown properties of individuals who do not pay their property taxes on time or at all. Most state or local municipalities offer tax equity investments at annual tax lien sales held at courthouses. Investors can purchase these them for either a portion of the outstanding taxes or the entire tax amount, depending on the rules of the tax lien sale. Other restrictions may apply for receiving financial returns or the actual deed to the property behind the tax lien.
Investors receive payment on their tax equity investment once the delinquent taxpayer pays all outstanding taxes in full. The investor receives his or her financial return due to the fees assessed on the delinquent taxpayer. In most cases, tax authorities have no interest in owning a taxpayer’s property. They sell the investments in order to get money up front and avoid having to use debt in order to run their government agencies and related operations. Therefore, the rates of return on tax investments can be quite lucrative.