Losing a Home for Unpaid Taxes Often Means Losing Your Equity, Too

Last year, Massachusetts Democratic state Reps. Tommy Vitolo and Jeff Roy saw a newspaper story about two brothers in their state who had almost lost their home due to unpaid property taxes. That was followed by another article this year featuring a New Bedford woman, recovering from COVID-19, who slept in her car when her home was taken for the same reason.

While relatively rare, the plight of the homeowners highlighted in those stories is not confined to Massachusetts.

About a dozen states allow homeowners who don’t pay their property taxes to lose not only their houses, but also the years of payments they have made on the property, known as equity, according to the Pacific Legal Foundation, a libertarian group that has filed suit on behalf of many homeowners in this position, including those in Massachusetts.

Sometimes the local governments take over the properties; other times the municipalities sell the liens on those unpaid bills to private investors who can then foreclose.

To the lawmakers, it didn’t seem fair.

“This seemed like the kind of thing we could fix,” Vitolo said in an interview. He and Roy filed a bill to increase the required notices to homeowners — some, in person — to make it harder for a notice to slip by, or at the very least give the homeowner the opportunity to collect their equity in the property after a sale, provided all the taxes, fees and interest have been satisfied.

The bill got little traction this year amid more pressing priorities spurred by the pandemic, Vitolo said, but the two lawmakers plan to revive it in January.

In many states, homeowners who are evicted and lose their homes for failing to pay property taxes are given the profits of the home’s sale, after taxes and interest are taken care of. But in others, homeowners walk away with nothing.

Opponents of the practice include AARP and conservative groups such as the National Taxpayers Union, the American Legislative Exchange Council, known as ALEC, and the libertarian Pacific Legal Foundation.

“At the heart of the matter, it’s the government taking more than it’s owed from citizens it’s supposed to be serving,” said Gretchen Baldau, ALEC’s director of its commerce, insurance and economic development task force. “People owe property taxes, they should pay their property taxes, but this is an issue of fairness.”

But advocates fear such changes are far down legislatures’ to-do lists, and the investment firms that buy up tax liens defend the action as protective of taxpayers’ interests.

There have been some changes in the past decade. After extensive reporting by The Washington Post in 2013, the District of Columbia changed its laws to protect at least some equity of tax-delinquent homeowners.

And in a related case, and after reporting by numerous outlets including The Baltimore Sun and Stateline, Baltimore was stopped from seizing homes due to unpaid water bills after the legislature and Republican Gov. Larry Hogan enacted a law to end the practice.

The U.S. Supreme Court is deciding whether to take up two Pacific Legal Foundation suits in Minnesota and Nebraska.

In most of the tax lien cases, residents who lose their homes don’t have mortgages but own the homes outright. Usually they are longtime owners — often retirees — who have paid off their 30-year note, or folks who inherited the home from relatives, mortgage free. The Maryland Department of Taxation, for example, reported that almost all tax lien sales are on properties with no mortgage.  

Unlike property taxes wrapped into mortgage escrow accounts, which are part of the monthly payment, taxes for homes owned outright are billed less frequently, sometimes only once a year. If homeowners haven’t saved up, the big tax bill could prove problematic.

“Many of the people who find themselves in this circumstance are juggling,” Vitolo said. “They don’t have enough to pay their bills. They start taking guesses on what they can pay now, which ones they can skip a few months. Often, they are folks who are older, who have a disability or dependents. Maybe they are disorganized, and they did get a bill, but [it] fell between the cushions of the couch.”

Selling the Liens

Local governments may conduct tax lien sales after property owners are delinquent for a year or more.

The frequency varies, and sometimes if the owners can’t be reached, the pending sale must be advertised in a newspaper. If an investor buys the lien, the local government gets the past-due money from the investor and often is done.

Investors then charge homeowners for both the delinquent property tax and additional interest, turning a profit. And in some states, if homeowners don’t pay, the investor can foreclose, evict the residents and sell the property.

Advocates for investors say buying tax liens can be a good investment because most homeowners eventually find a way to pay the taxes, plus interest, making profits for the investors. Sometimes, the homeowners can sell the house or find friends or family to lend them money to cover the tax bill, according to Dan Hill, an attorney for the Massachusetts tax lien investment firm Tallage, which was involved in the two headline cases.

The towns, cities and counties benefit too, by selling the tax liens.

Brad Westover, executive director of the National Tax Lien Association, which represents investors’ interests, stressed that municipalities and counties are the beneficiaries of the tax lien sales. He noted that every jurisdiction “has to pay for police, fire, and parks and rec.”

When the municipalities sell the tax lien, they benefit from the transaction, said Ralph Clifford, a professor at the University of Massachusetts School of Law, who has studied the issue. “It’s obviously very lucrative for the towns. It can provide quite a windfall, especially in towns that are more economically distressed because they have more foreclosures.”  

But for those homeowners who can’t make the payments, the results can be devastating.

The story that first got the Massachusetts lawmakers’ attention involved the Mucciaccio brothers, Mark and Neil, in their 50s, who inherited a home worth about $60,000 in 2019, though it sits on land that in 2021 was valued at about $225,000. They fell on hard times and hadn’t paid the taxes since 2016, according to The Boston Globe, and owed $30,000.

Tallage bought their tax lien. With some help from the Pacific Legal Foundation, the brothers negotiated a deal when a relative stepped up to take out a loan to pay the taxes.

But earlier this year, another case hit the headlines, piquing the lawmakers’ interest further. Deborah Foss, then 67, lost her home after Tallage bought her lien and then foreclosed for the lack of tax payment of roughly $30,000. She, too, was denied her equity, according to her attorney, Christina Martin of the Pacific Legal Foundation.

“They foreclosed, took the house, evicted her, just as she was recovering from COVID,” Martin said in an interview. “She became homeless and was sleeping in her car in February.”

As a result of the lawsuit, Foss got $85,000 and is getting back on her feet, Martin said.

The press reports have rallied other lawmakers to take notice and support the bill.

Massachusetts state Sen. Mark Montigny, a Democrat, said the practice allows “private, profit-driven companies to prey upon the misfortunes of homeowners, robbing them of every cent of their equity.” In an email, he called it “unconscionable.”

“Pushing out senior citizens, people with disabilities, and those facing tremendous personal challenges is atrocious,” he said. “The legislature should act immediately to implement a statewide ban.” 

Westover, of the National Tax Lien Association, said the group has drafted model legislation that he said would benefit four groups: local governments, current taxpayers, delinquent taxpayers and investors.

Massachusetts, he said, is a small market that doesn’t carry much weight in the industry. He said the Bay State appears to be one of the bad actors, as it is one of the dozen or so states that don’t allow homeowners to recoup some or all of their equity. “Some of that Massachusetts negative press is earned.”  

Fighting in Court

The Pacific Legal Foundation has brought similar cases in several other states. Two cases are now awaiting consideration by the U.S. Supreme Court, including a case from Minnesota, Tyler v. Hennepin County.

In that case, attorneys for Geraldine Tyler argued that when Hennepin County took her condo in Minneapolis for unpaid property taxes and sold it, keeping the profit while not paying her for her equity, the act was an unconstitutional violation of the Fifth Amendment’s “takings” clause. That clause states that private property shall not “be taken for public use, without just compensation.” Further, the Pacific Legal Foundation argued that the procedure violated the Eighth Amendment’s prohibition against “excessive fines.”

Tyler lost in a lower court, which said Minneapolis gave Tyler ample time to either pay the taxes or sell the property to recover her investment, and therefore didn’t violate her rights.

A similar case from Nebraska, Fair v. Continental Resources, also is on appeal to the high court on similar grounds, except that the tax lien was sold to a private company. Again, a lower court in Nebraska ruled against the homeowners.

Taking anything more than the taxes owed (with fees and penalties), especially a homeowner’s equity, “is either is a form of theft, a taking without just compensation, or an excessive punishment for the non-criminal offense of failing to pay property taxes,” Martin said.

“When something like this stands out so starkly — people having their biggest investment ball taken from them for an outstanding tax as little $9 — it’s a powerful rallying call that all groups of all persuasions and beliefs realize is not fair to people,” ALEC’s Baldau said.

But industry leaders dispute the claims of unconstitutionality. Hill, the Tallage attorney in the Massachusetts cases, said buyers wouldn’t invest in a process considered unconstitutional. He pointed to the lower court decisions upholding the practices.

“Consider the source,” he said of the Pacific Legal Foundation in an interview. “It’s coming from a libertarian, anti-tax organization based out of Sacramento running around the country essentially trying to gut tax laws and make it harder for municipalities to collect taxes. What gets lost in the cases that Pacific brings are that property taxes pay for schools, firefighters, police and other municipal services.”

In response by email, Martin wrote: “PLF is not anti-tax; we are anti-injustice. PLF has consistently argued that the government is entitled to take what it is owed in taxes, interest, fees, and reasonable costs, and sometimes that means it must seize property to collect the debt. But what the government cannot do is take more than it is owed.”