How a Supreme Court Ruling Changed Tax Title Investment in MA & RI

Nov 12

For decades, investment in tax-distressed properties in Massachusetts and Rhode Island has offered investors the ability both to make a profit and to restore real estate to valuable use. But investors here have been suffering from massive uncertainty since a revolutionary decision in the US Supreme Court in 2023. It’s no longer clear how profitable these investments will be going forward—expert legal help is now essential.

For cities and towns in Massachusetts and Rhode Island the chief remedy for unpaid property taxes has been to record and enforce a lien on the property for those taxes in a “tax taking.” If the owner did not afterwards pay the taxes then, often within months, the city or town would auction the property itself to the public. The successful investor’s price at auction would satisfy the city or town’s tax lien and the investor would get title to the property. It was not unheard of to win property worth tens or hundreds of thousands of dollars for a few thousand dollars at these auctions.

And here is where the tax-lien investor would profit. The investor would petition in court to forever prevent the original owner from paying off the taxes. Once a court ordered this “foreclosure of the equity of redemption,” the investor would own the property (and all the equity in it) outright — outright ownership of an entire piece of real estate for the auction price paid along with legal and court fees. The city or town would be paid, the investor would be rewarded with the equity in the property, and valuable real estate could get back on the market.

But in 2023 the Supreme Court attacked this incentive to buy tax titles. In Tyler v. Hennepin County, 591 U.S. 631 (2023), the justices held that for a city or town to take all the equity in property is an unconstitutional government taking of all the equity over and above the the value of the taxes owed. If applied to an investor’s purchase from a city or town, this decision removes the investor’s incentive to buy the tax lien. The investor would likewise have to return to the original owner the equity over and above the taxes owed, not keep it as profit.

Unfortunately, we who live, work and invest in Massachusetts and Rhode Island don’t have clear answers to many questions. Neither the courts nor the legislatures have told us:

What percentage of equity must the buyer of a tax title return to an original owner; and what can the buyer keep for the risk and effort the buyer assumes?
What happens if no original owner can be found—can the buyer then keep all the equity?
Will the courts and legislatures make the tax title process simpler and cheaper, to encourage investors to buy tax titles in this new environment?

Investors in tax title need expert legal guidance when facing this uncertainty.

David Perry at PK Boston Law is an expert in tax titles and all aspects of owning and transferring real estate in Massachusetts and Rhode Island. Investors in tax titles, as well as anyone facing a real estate issue, is encouraged to contact him or the firm for a consultation.