Local Governments Are Seizing and Selling Homes Over Small Tax Debts

In 2021, on April Fools’ Day, Manistee County, Michigan, took the title on Chelsea Koetter’s home because of a small debt she owed on her 2018 property taxes. Unfortunately, this wasn’t a prank.

Four months after seizing her home, which she shared with her two sons, the government auctioned it off for $106,500. It kept the profit.

All told, Koetter owed the government $3,863.40, which included her initial tax debt as well as penalties, interest, and fees. She does not contest she was obligated to pay that. At issue is whether the county acted lawfully when it pocketed the remaining $102,636 after selling her house, a practice known as home equity theft.

The issue may sound familiar. In 2020, the Michigan Supreme Court ruled the practice unconstitutional after the government seized Uri Rafaeli’s home, then sold it and kept all the proceeds in excess of what he owed. His initial tax debt was $8.41.

The U.S. Supreme Court weighed in on the issue last year in Tyler v. Hennepin County, ruling unanimously that Hennepin County, Minnesota, violated the Constitution when it seized an elderly woman’s home over a debt, sold it, and kept the profit. “A taxpayer who loses her $40,000 house to the State to fulfill a $15,000 tax debt has made a far greater contribution to the public fisc than she owed,” wrote Chief Justice John Roberts, referring to plaintiff Geraldine Tyler, who had fallen $2,300 behind on her property taxes. The total came to $15,000 after penalties, interest, and fees. After the sale, the government kept what was left over—$25,000. The Court said that was illegal.

Instead of complying with a straightforward interpretation of the law, Michigan has attempted to dance around it, passing a byzantine debt collection statute that sends homeowners on a wild goose chase should they want their equity back.

“Following foreclosure, and before any property is sold or the amount of surplus, if any, is known, owners must properly serve a notarized and completed claim form with the foreclosing government unit within 92 days,” reads a lawsuit filed by the Pacific Legal Foundation on Koetter’s behalf. “Approximately a year after foreclosure, and many months after the sale of their properties, owners must file a separate motion in the foreclosure action that took their homes, seeking distribution of any surplus proceeds.” Erring during the process dooms a claim.

Koetter is intimately familiar with what one can lose at the hands of technicalities and oversights. After falling behind on her taxes, she was able to pay her 2019 and 2020 bills with help from family. Her 2018 taxes were not fully satisfied, she contends, because of a slip-up—by a government employee. At the local office, her father, who was helping her pay her debts, reportedly asked the person assisting him “to verify that all taxes were paid,” according to Koetter’s complaint, “and they looked up the records and confirmed that I was paying all taxes that were due.” The employee allegedly missed something.

Koetter is not alone in suffering this injustice. After the Supreme Court’s ruling in Tyler, a handful of states—Arizona, Alabama, New York, and New Jersey—created systems that technically abide by the letter of the law but not its spirit, devising complex systems that place the burden on the property owner to fight for their equity back after a seizure.

Meanwhile, a federal lawsuit outlines yet another creative way people are losing equity at the hands of government. In Baltimore, the Edmondson Community Organization (ECO)—a nonprofit dedicated to revitalizing the city’s Midtown-Edmondson area—accrued a $2,543 property tax debt. So in 2018, the city auctioned off that lien for $5,115 to a California-based investor, who sold the ECO’s building for $139,500. In return, the ECO got a check for the difference between its debt and the lien purchase price: $2,572. In other words, the organization essentially paid six figures to compensate for the $2,543 it owed.

Local governments and their citizens will continue to debate how high property taxes should be and what financial penalties an owner should bear for falling behind on them. What should be beyond debate at this point, however, is that the government cannot satisfy that bill and then concoct clever ways to pull off a legalized form of larceny.

The post Local Governments Are Seizing and Selling Homes Over Small Tax Debts appeared first on Reason.com.