Property tax loophole is means less tax revenue for cities - FOX 10 News | fox10phoenix.com

Property tax loophole is means less tax revenue for cities

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Michael Jaafar, ATTY.  Jaafar and Mahdi Law Group in Dearborn talks to Murray Feldman about property taxes and loopholes.

Atty Jaafar says:

There's a loophole in Michigan law that allows home owners to sometimes erase their property tax debt, and unpaid utilities. Millions of tax dollars in the city of Detroit alone are being wiped out each year by people who take advantage of this loophole.

Here's the way it works: when people get behind on their property taxes (it usually takes two years before the treasurer will try to auction it for nonpayment of taxes), then there is an auction in September. At this auction, anyone, including the homeowner, can buy the house back for the mere price of the taxes that are owed. The sad part is that many homes don't even sell for that amount. So there is a back-up auction a month later (the "October auction"). In that auction, whatever was leftover from the September auction sells for any price. The bidding starts at $500 per house.

When a homeowner stops paying their utilities, and taxes, some of the utilities get added to the tax bill. So when they buy their house back at the second auction, they are wiping out most of their liability.

And there is very little risk involved. The risk is that someone else steps up and buys it, because investors scout these auctions. However, there is not a lot of risk of that happening because the homeowner has 30 days to redeem their house anyway. And investors know that. So there is a lot of incentive for homeowner to get behind intentionally, and bank on the fact that no one will want to take a chance on buying their home; and people who make that calculation are by and large correct; here are some reasons why: if you are an investor, you don't want to waste your time with this because you know people will likely redeem, and you tied up your money for no reason; and if people don't redeem, then they may trash the property out of spite; or maybe the property is in very bad condition, which you wouldn't know because you have to buy these properties "sight unseen." many invests avoid doing that.

Some people shun this practice, claiming that it is unfair. And that's understandable. Most people work very hard to pay their taxes, which we all benefit from.

Others defend the practice by claiming that it is the cities fault for not properly assessing their homes value, and asking them to pay more than it's worth. So there are two sides to the story.

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