A unanimous ruling by the U.S. Supreme Court (SCOTUS) back in May 2023 will have national implications in protecting homeowners in financial straits from losing money they are legally entitled to. Colorado is one of several states particularly affected by the ruling, as this article will explain.
The SCOTUS case involved a 94-year-old Minnesota grandmother named Geraldine Tyler. She owned a condominium that had accumulated about $15,000 in unpaid real estate taxes along with interest and penalties. Her county seized the condo and sold it for $40,000, then kept the $25,000 excess over Tyler’s tax debt for itself. Tyler filed suit, alleging that the county had unconstitutionally retained the excess value of her home above her tax debt in violation of the Takings Clause of the Fifth Amendment and the Excessive Fines Clause of the Eighth Amendment. The District Court initially dismissed the suit for failure to validly state a claim, and the Eighth Circuit affirmed.
But the Supreme Court disagreed with these lower court rulings. SCOTUS said Tyler validly stated her claim under what’s called the constitutional Takings Clause, which provides that “private property [shall not] be taken for public use, without just compensation.” Whether any remaining value from a tax sale is property protected under the Takings Clause has historically depended partly on state law, which can vary from one state to another. SCOTUS ruled that while state law is an important source of property rights, “it cannot be the only one,” and “while the County had the power to sell Tyler’s home to recover the unpaid property taxes, it could not use the tax debt to confiscate more property than was due.”
Why Supreme Court Ruling impacts Colorado
The Court said its own precedents have long recognized the principle that in circumstances such as these, a taxpayer is entitled to the surplus in excess of the debt owed. The Court also rejected the Minnesota county’s argument that Tyler no longer had property interest in the surplus because she constructively abandoned her home by failing to pay her taxes. Not so, SCOTUS said. It stated that abandonment requires the “surrender or relinquishment or disclaimer” of all rights in the property, and Tyler had not “constructively abandoned” her home by failing to pay her taxes.
The Court ruling noted that today, most states and the federal government require excess value to be returned to the taxpayer whose property is sold to satisfy outstanding tax debt. Colorado has not been one of them, however. According to the Pacific Legal Foundation (PLF), in Colorado and in the states of Alabama, Maine, Massachusetts, Michigan, Minnesota, New York, North Dakota, Oregon, and Wisconsin, governments not only keep the value of unpaid property taxes and interest from the sale of a seized home, but they also keep the surplus value rather than return it to the property owner. In Arizona, Colorado, Illinois, Massachusetts, and Nebraska, PLF says private investors often reap the gains in what it terms “home equity theft” as they buy up tax-delinquent properties. PLF claims the practice robbed owners of nearly 9,000 homes and more than $860 million in life savings from 2014 to 2021. At least one website — TaxLiens.com — lists nearly 50,000 properties subject to tax liens in Colorado, sorted by county. The website calls these properties “super attractive (and potentially extremely lucrative) investments.”
Why Coloradans, and others, should care about Tyler’s case about Home Equity Theft
According to legal researchers at Nolo.com, Tyler’s win at the Supreme Court affirms that government retaining surplus value in a home over and above tax debt is wrong and unconstitutional. “Local governments around the country will no longer be allowed to pocket surplus proceeds from tax forfeitures,” Nolo says, “and from now on, they’ll be compelled to return that money to property owners.” Tyler will be entitled to recover the amount of equity she can prove is rightfully hers. She might also be able to recoup monies on the excessive fines question.
Nolo adds that everyone should care about Tyler’s Supreme Court win “because the government shouldn’t be allowed to take more than what it is owed and does not have a license to violate your constitutional rights. Home equity is private property and, therefore, just as protected by the Constitution as a home or land.” Plus, “Delinquent property taxes neither wipe out equity nor relieve the government’s obligation to pay just compensation. Property rights do not evaporate simply because you owe the government money or because the state passes a law declaring that the property interest doesn’t exist.”
How Colorado handles delinquent property taxes
It’s important to note that the SCOTUS ruling applies only to a state or county taking away an owner’s excess equity in a home when tax delinquency actions are in play, or when excess fines are levied. The government is still able to collect legitimate tax debt, just not any extra amount that rightfully goes to the homeowner.
The National Center on Law and Elder Rights states that “Property tax liens and foreclosures pose a significant threat to older homeowners’ ownership and equity, with a disproportionate impact on historically marginalized communities.” Nolo.com says all states have laws that allow the local government to sell a home through a tax sale process to collect delinquent taxes. If you don’t pay your property taxes in Colorado, the delinquent amount becomes a lien on your home. A lien effectively makes the property act as collateral for the debt.
Tax lein sales in Colorado
Once there’s a tax lien on your home, the tax collector may sell that lien at an auction. This auction is called a “tax lien sale.” The winning bidder gets a certificate of purchase and the right to collect the delinquent amounts from you. If no one bids for the lien at the sale, the county treasurer will “strike off” the lien to the county (or city, town, or city and county) for the amount of past-due taxes, delinquent interest, and fees. The county then gets the certificate of purchase. If your home is struck off to the county and the county has held the certificate of sale for three or more years, and you have not paid off the debts, the board of county commissioners may apply for and receive the title in the same manner as if a private individual (or entity) purchased the lien.
You may be able to “redeem” your home in Colorado
Even after a tax lien sale and ahead of any person or entity taking full possession of your home, you do get the opportunity to pay off the overdue amounts and “redeem” the home. In Colorado, you get a three-year period following the sale during which you can do this redemption. If you haven’t redeemed after three years, the holder of the certificate of purchase can apply to the treasurer for title to your home and accordingly get a deed to it. You can redeem at any time before the treasurer signs the treasurer’s deed giving title to the purchaser. But if you don’t pay off the past-due amounts, plus interest and costs, eventually the purchaser of the lien can get title to the property.
To redeem your Colorado property following the tax lien sale, you must pay the following:
- the amount of the delinquent taxes
- the amount of the delinquent interest
- costs, like newspaper advertising fees
- redemption interest from the date of sale, and
- all taxes accruing on the home after the sale, which the purchaser paid, and that are endorsed on the certificate of purchase, plus redemption interest.
After the person or entity that bought the lien on your house at the tax sale requests a deed from the treasurer, the treasurer must serve you a notice by personal service or by either registered or certified mail not more than five months nor less than three months before the deed is issued. The notice will include, among other things, when the time for redemption expires or when the tax deed will be issued.
Other key timelines in Colorado
Property taxes in Colorado become due and payable on January 1 of the year following that in which they’re levied and become delinquent on June 16 of that year. Properties are eligible for a tax lien sale the same year they become delinquent. The county treasurer sells tax liens at a public auction. Colorado tax sales typically take place in the fall of each year (but this can vary). The bidding starts at the amount of the delinquent taxes, interest, and fees then due.
If you do ever get behind on your taxes, you will receive a notice of that from the county treasurer no later than September 1. The notice will inform you that the treasurer will sell the tax lien for your home at a public auction on a certain date if you don’t pay the delinquency by the date specified in the notice. That payment date must be no less than 15 days from the date the notice was mailed. The treasurer must also publish notice of the tax lien sale, including the date, time, and place of sale, in a newspaper, and post the notice in a conspicuous place in the treasurer’s office.
If there’s a mortgage in the picture in Colorado
Homeowners with mortgages, of course, are responsible for paying property taxes on their homes. If you don’t pay these taxes when they’re due, the mortgage loan servicer usually advances funds to pay them and then bills you for the amount. Why would a servicer do this? Because property tax liens almost always have priority over other liens, and if you lose your home through a tax deed process, your mortgage gets wiped out. So, the loan servicer will usually advance money to pay delinquent property taxes to prevent this from happening.
The servicer will then demand reimbursement from you (the mortgagee). If you don’t reimburse the servicer for the tax amount it paid, you’ll be in default under the mortgage terms, and the servicer can foreclose on your home in the same manner as if you had fallen behind in monthly payments. The home can then be sold. Should this ever occur, you will get notified before a foreclosure sale happens. Beyond just the convenience factor, this is why mortgage servicers typically set up an escrow account for the mortgage where you pay a portion of the year’s property taxes each month along with principal and interest on your home loan. The loan servicer then pays the taxes on your behalf through the escrow account.
When Coloradans face difficulty in paying property taxes
Although you do have some steps you can take when you become subject to tax delinquency actions, it is far better to be preventative and take action before you become delinquent to hopefully make the taxes more affordable. E.g., you can check to see if you qualify for property tax abatement, or you might request a change in the property’s assessed value if you feel it is set too high.
The following two AgeWise Colorado articles contain additional information that may prove helpful, one on tax savings and deferral programs in Colorado, and the other on reverse mortgages.
If you’re already facing a property tax lien sale in Colorado and have questions (or need help redeeming your property), consider talking to an attorney. A foreclosure lawyer, tax lawyer, or real estate lawyer may be of most help for you.