Homeowner Rights and How the Government Steals Home Equity
By: Celene Chen, RBFL Student Editor
When a homeowner stops paying their property taxes, the government is well within its rights to foreclose and sell the home to pay for the taxes it is owed. Of course, the proceeds of the sale should go to paying the property-taxes the homeowner owed. But what happens when the home sells for more than what the homeowner owed? Logically, one would expect the government to take what it is owed and return the rest of the sale price to the homeowner. One might even characterize a government taking more than it is owed as theft.
So why is it that eight states have laws that explicitly exclude homeowners from the profits of their homes’ sales in tax foreclosure?[1] In other words, eight states have laws endorsing government theft. These laws, commonly called surplus retention statutes, vary in degree of severity. Some of these states—Alabama, Indiana, Illinois, Oregon, Minnesota and Mississippi, to be exact—provide a “redemption period” after the home’s sale where, if the former owner pays all previous delinquent taxes and fees, interest, and, sometimes, the purchase price of the property, the home is returned to the owner.[2] However, homeowners shouldn’t even have to pay fees and wade through a bureaucratic process to access the home equity they rightfully own after the government’s taxes are paid. On the other hand, Arizona and Missouri don’t even provide a redemption period, meaning homeowners don’t even have a chance to buy back their homes.[3]
The loss of home equity in these states – or the amount of equity stolen from homeowners – is staggering. In Oregon, a county foreclosed on a home-owner who owed $14,216.91 in taxes and fees, and his home sold for $167,000.[4] He lost home equity of $152,783.09 to the county.
What can be done about this egregious practice of state theft? Michigan, until recently, had a statute that excluded homeowners from the surplus proceeds of tax foreclosure and did not provide a redemption period. But, on July 17, 2020, the Michigan Supreme Court found the statute violated the Michigan Constitution because it permitted unconstitutional takings.[5] The courts in the remaining eight states that have these surplus retention laws – laws allowing the government to keep the profits from the sale of a homeowner’s home – should look to their own state Constitutions and do the same.
But protecting homeowner rights can stretch beyond just these eight states. Massachusetts does not have a law excluding homeowners from the profits of their homes’ sales in tax foreclosure. However, Massachusetts does have a provision that allows a foreclosing governmental unit to use a “tax deed” to transfer title of the home to the government.[6] If the government forecloses using this process, it voids all claims made against the home. In other words, while the Massachusetts law gives homeowners rights to the profits, there is a large loophole that a foreclosing government unit can use to remove homeowner rights to profits.[7]
Government theft has no place in the U.S. taxation regime, and these laws and practices must be abolished to protect homeowners’ rights in their home equity.
[1] See e.g., Ala. Code § 40-10-28 (2020); Ariz. Rev. Stat. Ann. § 42-18267; Ind. Code Ann. §§ 6-1.1-25-4, 6-1.1-24-6.1 (West 2020); 35 Ill. Comp. Stat. Ann. 200/21-350, 200/21-370 (West 2020); Or. Rev. Stat. Ann. § 312.120 (West 2020); Minn. Stat. Ann. §§ 281.17, .02 (West 2020); Miss. Code. Ann. § 27-45-3 (West 2020); Mo. Ann. Stat. § 92.750 (West 2020).
[2] Ala. Code § 40-10-28 (2020) (providing redemption period of three years during which the county retains the excess in a county treasury account while also retaining interest on that excess); Id. §§ 40-10-193, -121, -122 (requiring payment of all taxes, interest, penalties, fees, purchase cost of the home and eight percent interest on both the purchase cost of the home and any excess bid up to 15 percent of the home’s market value); Ind. Code Ann. §§ 6-1.1-25-4, 6-1.1-24-6.1 (West 2020) (providing redemption period of one year after sale or 120 days after sale to qualified purchasing agency and requiring payment of minimum bid, ten percent of selling price, attorney’s fees and costs of giving notice, costs of title search, taxes and assessments paid by purchaser of home with an added interest rate of ten percent, and all costs to county to sale); 35 Ill. Comp. Stat. Ann. 200/21-350, 200/21-370 (West 2020) (providing redemption period of two years and requiring payment of all taxes, costs, interest, and a penalty interest of twelve percent for how long taxes were delinquent); Or. Rev. Stat. Ann. § 312.120 (West 2020) (providing redemption period of two years and requiring payment of all delinquent taxes and taxes after the property was sold, interest on those taxes, a five percent penalty on the total amount, and $50 or the title search fee); Minn. Stat. Ann. §§ 281.17, .02 (West 2020) (providing redemption period of three years and requiring payment of bid in cost for government to purchase, all delinquent taxes prior to and after sale, penalties, costs, and interest); Miss. Code. Ann. § 27-45-3 (West 2020) (providing redemption period of two years after day of sale and requiring payment of all delinquent taxes, a five percent penalty on delinquent taxes, costs to sale, all taxes since sale, and interest rate of 1.5 percent per month for both taxes and costs).
[3] Ariz. Rev. Stat. Ann. § 42-18267 (providing that the owner’s failure to redeem before the deed is delivered to the state terminates any redemption rights); Mich. Comp. Laws Ann. § 211.78g (West 2020) (providing the redemption period ends on the March 31 after the judgment of foreclosure, the date when fee simple title of the property vests absolutely in the foreclosing governmental entity); Mo. Ann. Stat. § 92.750 (West 2020) (providing a failure to redeem before the sale bars the former owner from ever exercising a redemption right).
[4] Reinmiller v. Marion, No. 05-1926-PK, 2006 WL 2987707, at *2 (D. Or. Oct. 16, 2006) (once the redemption period expired, the county was within their rights to sell the property).
[5] Rafaeli. v. Oakland, No. 156849, 2020 WL 4037642 (Mich. July 17, 2020).
[6] Ralph D. Clifford, Massachusetts Has A Problem: The Unconstitutionality of the Tax Deed, 13 U. Mass. L. Rev. 274, 276 (2018) (“Most commonly, a Massachusetts municipality uses a “tax deed” that is executed by the tax collector and recorded on the land records. Using this document, the municipal officer transfers title to the land from the taxpayer to the town, subject to a right to redeem title if the taxpayer satisfies the tax debt and associated costs. If the tax debt is not paid, Massachusetts law uses strict foreclosure to extinguish the remaining title held by the taxpayer, known as the right of redemption.”).
[7] Id. at *276-277 (The municipality gains a windfall – “title to the land free and clear of all other claims being made against the property.”).