Investing in real property tax liens, like in Arizona, or real property tax deeds, like in Florida and many other states, may be a good investment tool to increase an investor’s real estate portfolio. In addition, buying real property tax liens and real property tax deeds help local governments with the shortfalls that are left when property owners refuse to or fail to pay their property taxes. Without real property tax liens and/or deeds our county governments could suffer financially and not have the money desperately needed to pay for schools, police and firefighters. In addition, having the ability to procure property through tax liens or tax deeds is good for neighborhoods when properties having once been abandoned or seriously neglected can be refurbished to add value to the community at large.

 

Unfortunately, real property tax collection systems like tax liens and tax deeds have been under attack in many states across the Country with Minnesota and Nebraska being the most notable recently. Even Arizona has not been safe from groups running to the Arizona legislature for the last three years in a row trying to completely upend Arizona’s tax lien statutes. These disingenuous groups claim that they are just trying to help the proverbial “little old lady” out from losing her home using scare tactics with phrases like “equity theft”. You may have even seen a recent article using that phrase in our local newspaper. But the reality is that these groups are only motivated by money themselves as they seek to change the foreclosure process to enable themselves to take control of the auction process for a profit.

 

In a recent U.S. Supreme Court case, Tyler v. Hennepin County, the United States Supreme Court ruled that Minnesota’s tax deed system may be unconstitutional as it may violate the takings clause of the Fifth Amendment to the United States Constitution which reads as follows: “Nor shall private property be taken for public use, without just compensation.”  In the Tyler case, the U.S. Supreme Court ruled that Tyler should have had the opportunity to apply for excess proceeds and Hennepin County should not have been able to just transfer the home to satisfy her tax debt.  While that may sound like a good result initially, the reality was that Tyler was completely upside down in her home and there was no equity to be had by her as she owed more than the home was worth to third party lenders. Thus, the ruling ultimately does not make sense practically speaking.

 

Arizona has a much different system than Minnesota’s.  The 5th Amendment protects against government takings.  But with Arizona’s tax lien system, the government does not take anything. Instead, 3 years after the taxes are owed, Arizona counties sell the tax liens to investors like you and I to cover the delinquent taxes.  The property owner has another three years from there before that tax lien investor can start the foreclosure process. The counties provide annual notices to the property owner so there are no surprises that the taxes are owed or that the lien has been sold to an investor.  And presuming the property owner maintains a good mailing address with the county assessor and treasurer, a property owner will be notified by the investor at least three times through an initial notice under A.R.S. § 42-18202, service of a summons and complaint and service of an application for entry of default before a foreclosure can even occur giving the property owner ample opportunity to redeem and pay the outstanding taxes.   

 

By allowing the private sector to do the collecting and the length of time it takes in Arizona, Arizona’s system is immensely distinguishable from the system in Minnesota.  Right in the beginning of the Supreme Court opinion it says the County seized the condo. Not a private actor like our system in Arizona. The Tyler appeal centers around the taking clause which would not apply to a private actor like Arizona tax lien holders. Also, the Minnesota system of foreclosing is much shorter than ours.  In Minnesota it is 1 year as opposed to 6 years like ours in Arizona before a foreclosure lawsuit can be brought.  Further, in Minnesota, the County gets a judgment and transfers property to the State which is not what happens in Arizona.  The State never gets title in Arizona.  In Minnesota, after the State gets title, the owner has 3 years to redeem to get title back but remains an equitable owner and if not redeemed the equitable interest is extinguished in favor of the State. The State could keep the property and never sell it. But, if it does sell it, the excess goes to the County. Nothing like that exists in Arizona either. In fact, in the limited situations where the State were to foreclose a tax deed, there is a mechanism in Arizona for the recovery of the excess proceeds for the property owner under A.R.S. § 42-18303.

 

In Tyler, the Supreme Court also discussed how under the Minnesota system the tax deed foreclosure does not extinguish the personal debt liability for the property taxes. That is a major difference from what happens in Arizona and a major factor in my opinion as to why the Supreme Court ruled the way it did. In Arizona, the personal debt for the property goes away with the foreclosure relieving the owner of any further tax liability which would be a benefit for a struggling property owner, not a detriment.

 

 In addition, while many pundits have their opinions on the ultimate impact of the Tyler case, the case was before the Supreme Court on a motion to dismiss. The actual merits of the case have not really been ruled upon yet. In my humble opinion, while not a constitutional law scholar, that makes the majority of the Supreme Court opinion something we call just dicta and most likely could not be used to challenge systems in other states like Arizona.  The U.S. Supreme Court did not straight up and come out and rule that the Minnesota law is unconstitutional per se just simply that Tyler had enough to maintain a cause of action that Minnesota’s system could be problematic. 

 

Further, there are protections for elderly and indigent homeowners that would not justify a change in Arizona’s tax lien system.  2 different homeowners in my cases this year have paid their taxes through the Arizona Department of Housing (“ADH” homeowners assistance program. The ADH begun implementation of a $197 million Homeowner Assistance Fund (HAF) Program. Arizona's plan was approved by the U.S. Department of Treasury on January 4, 2022, you can view live progress on applications received, applications approved, and up-to-date payment disbursement by visiting Arizona’s dashboard at https://haf.azhousing.gov/dashboard. In addition to the state of Arizona’s dashboard, the following link to the US Department of Treasury's website will provide you information about the federally funded program to assist distressed homeowners. (https://home.treasury.gov/policy-issues/coronavirus/assistance-for-state-local-and-tribal-governments/homeowner-assistance-fund).

 

In addition, seniors in Arizona are entitled to property tax relief coming in three different forms. First, there is an exemption for widows, widowers and totally disabled persons. For qualified people, the exemption has the effect of reducing the assessed value of the real property with a corresponding reduction in property tax. Second, there is a program of tax deferral. Under the deferral program, payment of property taxes is not required until the real property is sold or the person dies or the property becomes income producing. A.R.S. §§ 42-17301-17313). Third, under Proposition 104, which passed in 2000, qualified individuals are granted a property tax freeze. All of these programs are administered by your local County Assessor’s office. For more information on these programs, you may contact the Arizona Department of Revenue at (602) 716-6843 for general information or your local County Assessor’s office for more detailed information and any necessary applications.

 

Based upon the numerous protections that exist, there is no need for a change to Arizona’s tax lien system. I am optimistic that Arizona’s tax lien system can continue to exist as a good investment tool for investors and a good tax collection mechanism for our county governments.  At Hymson Goldstein Pantiliat & Lohr, our business is your peace of mind.