Stop “Legal” Tax Lien Theft


Lew Sichelman

Deborah Foss is a 67-year-old grandmother in New Bedford, Massachusetts, who survives on a small fixed income from Social Security. She suffers from several health issues, including chronic lymphocytic leukemia, COPD, and neuropathy.

She used to own a house, but now lives in her car.

She no longer has a roof over her head – largely because a tax lien investor took the equity she had in her home. But with the help of a nonprofit legal group, she fights back.

Foss has sued Massachusetts, challenging a law that allows private investors to forfeit all owners of equity in their homes — beyond what they owe in back taxes and interest on the unpaid balance.

Pacific Legal Foundation is the nonprofit organization representing Foss, as well as owners in other states who have suffered the same fate. Between 2014 and 2020, according to PLF, Massachusetts allowed to collect some $37 million more than homeowners owed in property taxes. In Foss’ case, she was overdue on about $30,000 in back taxes, but the private investor who bought her tax lien was foreclosed, taking home a home worth $241,600.

This is what makes investing in tax liens so profitable. While PLF doesn’t have an exact tally, “it’s pretty safe to say” that investors have raised “hundreds of millions” nationwide, lead attorney Christina Martin told me. She called the practice “despicable.”

“When the government takes more than someone owes, it’s theft, and it’s wrong.”

— David Deerson, Pacific Legal Foundation

Lawyers call it “equity theft”

While it is perfectly legal to collect tax liens, PLF argues that collecting more than is owed amounts to “equity theft.” Said Martin: “We believe this is not only unconstitutional, but excessive punishment.” And the Sacramento-based legal group has none of it.

PLF, which defends people against government excesses, said 11 states — Alabama, Arizona, Connecticut, Illinois, Maine, Massachusetts, Minnesota, Nebraska, New Jersey, New York and Oregon — allow this stuff, which can affect commercial and residential properties. owners as well. A handful of other states have loopholes that allow the practice.

But a few states saw the craze of legalized tax lien theft and changed their rules. Last month, Wisconsin changed its law to guarantee the payment of property taxes, while providing that former owners receive whatever remains from the sale of their property. North Dakota and Montana did the same.

In Michigan, meanwhile, the state Supreme Court ruled that the old liens law violated the state’s constitution, ruling that people were entitled to any excess capital in their homes after the settlement. tax arrears. In the case that prompted the decision, Oakland County auctioned off Uri Rafaeli’s home for $24,500 because he underpaid his property tax by $8.41. The county took all the proceeds.

Nonetheless, PLF is now working with eight landlords in their lawsuit against the same Michigan County High Court. They are seeking to recover hundreds of thousands of dollars in equity lost when the county treasurer took their homes in payment of tax debts totaling only a fraction of their value.

According to PLF, the town of Southfield, Mich. (where Rafaeli lived) took advantage of a loophole in state law that allows towns to buy homes foreclosed on the county for the cost of tax debt — without paying the difference to the previous owners. While the scheme is a boon to some well-connected businesses in the region, it perpetuates the predatory seizure of home equity, attorney Martin said.

“When the government takes private property, it must pay just compensation, regardless of how it acquires the property,” she said. “The government has compensated homeowners with debt forgiveness representing only a fraction of the houses the government has taken. It is unconstitutional and unfair. »

The government takes more than its due

In New Jersey, the group is helping an East Orange owner who is challenging a state tax scheme that allowed the city to take her commercial property because she paid her taxes late. The property was worth about $80,000 more than she owed.

Lynette Johnson bought the property in 2014 but claims she never received her tax bill for that year. Unbeknownst to him, the city bought a lien on his property, seized and sold the property to private investors for $101,000 in 2018. The city kept every penny of the sale, leaving Johnson with nothing.

“While the government may take property to pay taxes, it is not entitled to anything more than it is owed,” said David Deerson, the PLF lawyer representing Johnson. “When the government takes more than someone owes, it’s theft, and it’s wrong.”

Even in places where owners are allowed to keep what’s left, state and local jurisdictions can sell tax liens to investors, usually for pennies on the dollar. Not only can these investors force the sale of the property, but they can often charge whatever interest rate they want until the lien is finally satisfied.

Still, the news isn’t all bad, Martin said, citing Florida as an example. The Sunshine State forces investors to compete on the interest rates they charge. The winning bidder is the one with the lowest rate, which means delinquent homeowners will owe less interest. Investors can still foreclose to satisfy liens in the state, but what remains must be returned to the previous owner.

There are several lessons here, #1 being: “Pay your taxes.” States aren’t the only entities that can take your home in lieu of payment: private investors can too. Just like Uncle Sam, if you don’t pay your income taxes.

lew Sichelman has been covering real estate for over 50 years. He is a regular contributor to numerous shelter magazines and housing and housing finance industry publications. Readers can contact him at [email protected]


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