In 2014, Michigan resident Uri Rafaeli underpaid property taxes on a rental unit he owned by $8.43. For his oversight, Oakland County seized his property and sold it at auction for $24,500.
The county pocketed all the proceeds from the transaction. Rafaeli received nothing.
The Pacific Legal Foundation calls this tax forfeiture practice home equity theft. And it isn’t an incident isolated in Michigan’s Oakland County. The legal advocacy group reports 13 states currently engage in such forfeitures: Alabama, Colorado, Maine, Massachusetts, Michigan, Minnesota, New York, North Dakota, Oregon, and Wisconsin.
PLF also notes that Arizona, Colorado, Illinois, Massachusetts and Nebraska allow private investors to reap the gains of home equity theft by assuming the title of a home in exchange for paying off delinquent taxes.
Homeowners who fall behind in their repayments sometimes lose property of value far exceeding the amount of the loan. The Omaha World-Herald reported the case of a 94-year-old widow who lost a $1.1 million farm and all of its equity over a $50,000 tax debt.
The PLF is assisting several Michigan property owners in their lawsuits against various local government entities, including 83-year old Rafaeli, a retired engineer.
“The Michigan Supreme Court has put Rafaeli on the November calendar, meaning it will be heard Nov. 6 or 7,” PLF Attorney Christina Martin told The Center Square. “We anticipate it will be heard on Nov. 7, but that date will not be confirmed until mid-October.”
Ralph D. Clifford is a professor of Law at the University of Massachusetts School Of Law at Dartmouth. Clifford authored a 2017 study on similar tax foreclosures and home equity theft in Massachusetts.
In an email to The Center Square, Clifford state: “The U.S. Constitution contains what is known as the Due Process Clause, which is found in the 14th Amendment. It prohibits states from taking individual's property without just cause. Further, it requires both that the state provide notice to the individual that property may be taken and that a hearing be provided before a neutral party (i.e., a judge).”
Clifford continued: “When a state takes the excess equity from a taxpayer above the amount that is owed (with appropriate interest and costs), it is taking property without just cause,” he said. “In the Massachusetts procedures, the tax collector can take the property on his or her own without submitting the claim to a judge or other neutral magistrate. Both of these violate the 14th Amendment Due Process Clause.”
When asked what steps he would recommend to remedy tax foreclosures that result in government claiming 100 percent of the proceeds, Clifford responded: “First, the states should be required to give any excess proceeds received back to the taxpayer. Second, in Massachusetts, the tax collector must be required to establish the right to take the property for taxes before doing so.”