Gov. Gavin Newsom recently signed a bill into law that closes what’s been called the “last major loophole” in property tax foreclosures. What does that mean?
When homeowners become delinquent on their property taxes, the local government can foreclose on the property and sell it at auction. Until a ruling by the U.S. Supreme Court (SCOTUS) in 2023, the government could keep all the proceeds from that sale, even if they exceeded the tax delinquency.
The SCOTUS ruling
As Chief Justice John Roberts said, “A taxpayer must render unto Caesar what is Caesar’s, but no more.” The SCOTUS ruling also upheld the “Takings Clause” of the Fifth Amendment. It says that the government shall not take private property without “just compensation.”
After that ruling, most states changed their laws so that the government was required to pay any excess it received on the sale of the property back to the people who had owned the home. However, loopholes that allowed what’s been called “home equity theft” or “shadow equity theft” remained.
How the California loophole worked
In California, one of these loopholes let county governments transfer these properties to government entities or non-profit organizations. Because this let them avoid selling the property, they didn’t technically receive any proceeds and therefore didn’t have to reimburse previous homeowners if their equity was worth more than they owed. That meant the government could potentially take possession of a property worth millions of dollars from a homeowner who owed thousands of dollars in property taxes without reimbursing them for the difference.
Under the new law, local governments must sell properties they foreclose on for unpaid property taxes and give any money made on the property that exceeds what the taxpayer owed back to them. One property rights advocate said, “For too long, California allowed local governments to strip homeowners of their life savings. With the signing of AB 418, that injustice ends.”
Most California homeowners likely didn’t know what the law allowed with the loophole or what it could mean for them with this new law. That’s one reason why it’s critical to have experienced legal support if you’re facing the potential loss of your home. Regardless of any liens or other encumbrances on it, it’s likely still one of your most valuable assets, and you should know and protect your rights.