Tax Loophole Stirring Up Trouble

Some mortgage owners in Detroit have found a unique loophole to dodge their unpaid debts. Many investment property owners have avoided paying their property tax bill by voluntarily defaulting on their mortgage payments.

Generally, homes at risk of foreclosure would end up getting sold at the auction and the previous homeowner would walk away absolved of their debt liabilities. However, this recently discovered path allows for property owner to erase tax debt by allowing their properties to enter foreclosure and then buying them back at the auction.

Flaws In The System

Besides the fact that property owners get to essentially erase their property tax bill, they also get to buy back the property for pennies on the dollar. Not fair? True. Not Legal? Surprisingly, yes it is legal.

Of the 3,700 properties sold at auction last year, nearly 200 of those properties were bought back by previous owners or under the names of close relatives. Further, many of these homes were bought back for under $1,000.

Detroit is one of the hardest hit housing markets in the country, expecting over 14,000 property auctions in the next few months. There is no question that this loophole allows for unfair practices, but currently there is no legal recourse for the city, lenders or other homeowners.

Honest paying homeowners claim something should be done, citing their payments of close to $1,500 in property taxes each year while these loophole bandits run away without paying thousands in tax debt. Further, the city is suffering through the loss of an estimated $1.8 million in unpaid property taxes.