Profiting on misfortune: Tax liens, home loss and county finance

There’s an old saying that nothing in life is certain but death and taxes. While death may come to us at any moment, our taxes arrive on a regular schedule.

Twice each year – once in November and again in May – treasurers from all 56 Montana counties prepare property tax notices on each of the nearly 600,000 privately owned homes, farms, businesses and undeveloped lots in the state.

A large majority of Montana property owners pay their property taxes regularly, if not reluctantly, knowing that failure to do so can result in serious consequences. Delinquent property taxes accrue ever increasing amounts of interest and penalties.

In Montana, if a property owner doesn’t pay their taxes over a long enough period of time, the deed can be transferred to a third-party tax sale purchaser, often for pennies on the dollar. Wait too long, and the recalcitrant property owner may find the house they live in belongs to somebody else.

As recently as 2009, Gary Guidotti owned four houses in Great Falls. None were luxurious or even particularly well maintained, but the money Guidotti collected renting them out helped to pay his bills.

Great Falls teen stabbing: Here's what we know

In the span of little more than six years, Guidotti has lost all four of his properties. They were either sold to a third-party investor in lieu of unpaid property taxes, or conveyed by quitclaim deed for the settlement of bad debt and outstanding attorney’s fees.

Now in the twilight of his life, the 78-year-old master electrician has been reduced to living in an aging motor home parked in the backyard of a house he once owned. When the summer nights get too hot, Guidotti sleeps on a bed shoved inside an old wooden shed filled with scaffolding and electrical conduit. This winter he plans to keep warm with a pellet stove jerry-rigged into the side of his motor home.

“They say if you don’t pay the taxes, you don’t own it anymore,” Guidotti said.

County attorney raises new issues on solar farm votes

He seems confused, uncertain of how it ever got to this point. Standing outside a broken-down, two-story house he once owned, Guidotti wonders aloud if his name is still on the deed. A large yellow sign hangs on the door, warning any and all trespassers that they will be prosecuted.

“That’s what happened,” Guidotti said quietly. “Somebody else came in and paid the taxes, and now they own it. What the hell do you do about it?”

All of this is perfectly legal.

According to the National Consumer Law Center, every state in the country has laws authorizing the creation of a lien against residential property when the taxes don’t get paid. The laws are not uniform, but their most punitive outcomes can be devastating.

Guidotti’s financial troubles began at the outset of the recession in 2007. His tenants stopped paying rent so he stopped paying his property taxes. The delinquency notices started piling up.

Property records show that in July 2008, Cascade County issued a tax lien on Guidotti’s house at 612 13th St. S. for unpaid property taxes equaling $1,125.45. Seventeen months later the county sold the tax lien to the Sunrise Financial Group investment company for $667.20. On Sept. 30, 2011, Sunrise Financial received a tax deed for the house.

For an initial investment of less than $700, Sunrise Financial acquired a property that was appraised in 2015 at a market value of $139,300. Gary Guidotti got nothing.

“This can’t be fair,” Guidotti said. “It (the law) has to be changed, but what’s the sense in fighting? The lawyers will have it all anyway. It’s just the way it goes.”

Many people agree.

Matt Pepos is Cascade County resident who has taken up changing Montana’s tax lien laws as a personal crusade.

“It makes my blood boil when I hear about things like this,” Pepos told the Cascade County commissioners regarding what happened to Gary Guidotti. “It’s like a vulture sitting on the fence waiting for you to screw up so he can take everything that you’ve got. I feel that Mr. Guidotti has been wronged and something has be done to change it.”

State surplus auction tallies $1M

The case of Gary Guidotti is more than just the story of an unfortunate old man who lost his property because he didn’t pay his taxes.

Gary Guidotti is now homeless and living on the edge of a sustainable existence. Pepos wonders what will happen to him in the years ahead when it becomes likely that Guidotti will no longer be able to care for himself. Will the state of Montana have to step in to provide housing, medical and social services at taxpayer expense?

Pepos asks if it wouldn’t have been better for everyone if Guidotti had retained a reasonable portion of the value of his properties? Why should the investors of Sunrise Financial Group reap windfall profits from Guidotti’s loss when at the end of the day it may well be Montana’s taxpayers who will have to pay for his late-life expenses? Was the $667 Cascade County received for Gary Guidotti’s home really worth it?

It’s important to remember that county treasurers have very little discretion when it comes to property tax collections. The process and schedule for recovering delinquent taxes is dictated by state statute.

In Montana, property tax lien assignments become available after the taxes have gone delinquent for no fewer than two months. At that point, anyone with an interest in the property; be it a neighbor, rival or property investment company, can come in, pay the back taxes and obtain a lien on the property attached to them.

Once a tax lien has been sold, state law guarantees the holder of that lien a 10 percent annual return on their investment – plus an additional two-percent per annum that goes to the county to cover administrative costs. If the owner of the property does not reimburse the lien holder for the entire amount of the accumulating debt within three years, then a tax deed is issued turning ownership of the property over to the lien holder.

And someone has just lost their land to back taxes.

Property tax collection in Montana is unique in that it relies upon the profit motive of private individuals to enforce compliance.

If you fail to pay your state income tax, you can expect to be contacted by the Montana Department of Revenue, which could eventually seize your property and sell it for back taxes. But you’re not going to get a letter from your neighbor down the street saying, “I’ve paid your state income taxes and if you don’t pay me back I’m going to take possession of your house.”

Montana’s process for third-party property tax collection was established in the late 19th century and, according to Ronda Wiggers, a lobbyist for the County Treasurer’s Association of Montana, the intent was to reduce the likelihood, or even the perception, that locally elected county officials were playing favorites when it came to tax collection.

“If you put the county in a collection mode it becomes a political issue,” Wiggers said. “By using the tax lien process and an outside third party you take the politics out of it.”

In simple terms, collecting taxes is not a popular task, and potentially seizing someone’s property to pay for back taxes is even less so. In small communities where county commissioners and county treasurers live and work, there could be a natural inclination — or at least a public perception — that county officials are less inclined to collect back taxes from their family members, business partners and other influential members of the community than from someone who they had no personal connection to.

“This process was set up to make it possible for a third party to come in and do the collections,” Wiggers said.

Not everyone is comfortable with this 120-year-old rationale for third-party tax collections.

“If there’s a problem with an unscrupulous treasurer or county commissioner not collecting taxes, that’s an issue of corruption that should be addressed by the courts,” said Tom Jacobson, a state representative from Great Falls who has been working for the past two legislative sessions to revise Montana’s system of tax liens and tax deeds.

“We shouldn’t be inviting these companies to come in, whose only motive is to earn as big a profit as they can, to collect our taxes for us,” Jacobson added. “It’s predatory in nature. Good government should be about something more than just profits. We should be doing everything we possibly can to help these people stay in their homes.”

According to Wiggers, less than 500 properties a year in Montana pass all the way through the three-year tax lien process and are forceably sold through a tax deed. Of these, just a small percentage are properties have significant commercial value.

“A lot of rundown buildings, pig sheds and contaminated soil,” is how Wiggers characterized the large bulk of properties that are obtained by tax deed in any given year.

Many are “orphan properties” – chunks of land that for one reason or another have been separated from a larger parcel and are far too small for significant commercial development. Others have simply been abandoned by their former owners because the cost to maintain or repair them exceeds their current value.

The small number of occupied homes that do fall to tax deed in Montana are almost always free and clear of any mortgage.

“If there’s a mortgage the bank is going to make sure the property taxes are being paid,” Wiggers noted. “They’re calculated into your mortgage payment. If for some reason you got a mortgage that allows you to escrow the property taxes on your own, which banks will sometimes do for an ag loan, the minute the bank finds out there’s a tax lien the bank will go and pay it anyway and add it to your bill. These are primarily properties that have no mortgage on them.”

From the counties’ perspective the larger problem may be what to do with the significant number of properties that nobody wants to be held accountable for, and have been abandoned leaving the county to care for them.

“What we’ve got to go through to get rid of a little piece of dirt that nobody wants is cost prohibitive,” Cascade County Commissioner Joe Briggs said. “Half the parcels that we (Cascade County) own … we don’t get enough out of them to even pay for the appraisal we’ve got to do in order to sell them. We’ve got hundreds of pieces of dead property that we own, and most of them don’t even have the availability of water.”

That was not the case with Tony and Ruth Rucinsky.

The Rucinskys bought a home in the Riverview District of Great Falls in 2007. A serious neck injury made it difficult for Tony to maintain steady employment, but the bills just kept coming. The Rucinskys put off paying their property taxes, not understanding the implication when they received repeated notices from the county that their taxes were delinquent and that a tax lien had been assigned against their house.

“Then we got a letter from this Montana Land Protection,” Tony said of the official notice they received that their tax lien had been purchased by a property investment company. “It almost made it sound like they were there to help people having trouble with their taxes. That was my first thought.”

Still the Rucinskys lagged in addressing the growing crisis that was engulfing their home. With only a few days left to resolve their tax debt, Tony Rucinsky made a last-ditch effort to obtain a loan from the bank and pay back what they owed.

“I had all the finances arranged,” he said, “but it didn’t match the tax debt that the county had recorded.”

Once a property tax debt has been sold as a tax lien, Montana law prohibits the county from accepting anything but full payment for the entire amount of the debt and there are no provisions for making partial payments. Miscalculating the tax lien’s full value was a fatal error.

The lien on the Rucinskys’ house became a tax deed. A few days later a representative of Montana Land Protection abruptly entered Tony and Ruth Rucinsky’s home.

“It was a Sunday morning and we were all in our pajamas,” Ruth Rucinsky recalled. “I had my nightgown on and we were making breakfast for the boys when this guy pulls up in his jeep and walked right in. He didn’t even knock, he just opened up our door and walked in. I was like, ‘Who are you?’ and then he says, ‘We own this place now and if you want to live here you can rent it from us or buy it back at fair market value.’”

The Rucinskys’ total tax debt plus interest and fees was less than $20,000, but the entire market value of their $185,000 home is now the legal property of Montana Land Protection.

“I laid on the couch downstairs the day after just sick — just literally sick,” Tony Rucinsky said. “What do we do? Everything we had I put into this house. I understand that it’s my own doing and I shouldn’t have waited. I kick myself for procrastinating, but I don’t think losing everything is just punishment for procrastinating either – is it?”

Jacobson doesn’t believe so. He acknowledges that every property owner has an absolute responsibility to pay their taxes in a timely fashion, and that in some cases there may be no other alternative than to compel the sale of a property. However, Jacobson argues that any tax collection system that has the potential to strip people of the entire value of their property when the debt they owe is only a small fraction of what the property is worth, is morally wrong.

“I think what really turns the stomachs of most folks is the absolute loss of property,” he said. “The goal should be to make everybody whole: the county, the investor and to whatever degree is possible the property owner themselves. If you do lose your property, at least it should be sold, the debt extracted from the proceeds and whatever cash value remains go to the original owner. I’ve never talked to a single person who doesn’t think that that’s fair. That’s what we really need to change.”

Tax lien sales drawing attention nationwide

All states have enacted laws that authorize both the creation of a lien against residential property when taxes on the property are not paid and the enforcement of this lien by a sale of the property. However, the increasing aggressiveness of investors in tax liens, coupled with a growing number of reports of people losing their homes based upon debts of a few hundred dollars have led to increasing scrutiny of property tax collection laws across the United States.

The National Tax Lien Association, a professional trade organization for the tax lien industry, reports that delinquencies on property tax total approximately $15 billion annually and that about a third of these delinquencies are purchased by tax lien investors each year.

“The increased interest in tax sales has raised concerns that some of the companies and individual investors engage in questionable practices to profit from tax sales,” a report from the National Consumer Law Center states. “The structure of tax sales in some states encourages collusion between investors, which often wreaks disastrous consequences on homeowners. Several big tax lien investment groups have been under investigation for antitrust violations and a few individuals have been convicted or entered plea agreements.”