How a mismanaged property tax break creates winners and losers in Detroit

This story was reported in collaboration with Outlier Media.

When Jackie Martin found out the house she had rented for nearly four years was headed for foreclosure, she didn’t see a tragedy; she saw an opportunity to work with the city and buy her home for the tax debt owed.

“Of course I’m going to try to stay in the house, because I’ve already invested in it,” Martin says, listing the repairs she had completed around the home. She was eager to become a first-time homeowner.

But before Martin could make arrangements with the city, her landlords broke the rules by getting a reduced-rate payment plan for the back taxes—an option that should have only been available to owner-occupants. The landlords used the payment plan to avoid foreclosure and then sold the house out from under Martin, who lost her chance to buy her home for a price she could afford.

One requirement for the payment plan Martin’s landlords received is having the Principal Residence Exemption, a state property tax break for people who live in the property they own. The exemption, often referred to as PRE, incentivizes homeownership, so taxpayers may only legally claim one.

An analysis by Outlier Media shows how flawed enforcement between the city, county, and state resulted in more than $500,000 of Detroit tax exemptions that should have never been given in 2018 alone. The city assessor takes a backseat approach to PRE enforcement, often using inaccurate data and relying on state intervention to rescind exemptions.

As a result, in a city where many homeowners have and continue to face foreclosure for a few hundred dollars of tax debt, other property owners are wrongfully receiving tax deductions for similar amounts.

At the United Community Housing Coalition, Michele Oberholtzer works with the city to arrange the sales of foreclosed homes to the renters who occupy them. According to her, the PRE is “powerful and simple”: for homeowners who qualify, the application is straightforward and doesn’t ever need to be renewed. Detroit homeowners save, on average, around $200 a year through the tax break.

“You get it once and it’s permanent, so if large efforts are made to correct that gap then they already have lasting impact,” Oberholtzer said. “But because it’s good and people know it, it’s abused.”

In Martin’s case, a wrongful PRE allowed her landlord to avoid foreclosure and ultimately eliminated her opportunity to become a homeowner. In other cases, mismanagement of PREs allows property owners to claim multiple exemptions.

When a property transfers ownership, the PRE should be voided. However, that process does not always happen, and the assessor’s ownership data is widely flawed.

One property owner, RTA Holdings LLC, appeared to own 27 properties that receive a PRE. Detroit Assessor Alvin Horhn confirmed that 23 of those properties were receiving a PRE because his office had failed to remove the exemption when RTA Holdings bought them. RTA Holdings no longer owned another three, which the assessor’s office became aware of only after investigating Outlier’s inquiry. The last property was not accounted for.

While Horhn said the exemptions for RTA Holdings are now rescinded, the exemptions on their properties totaled over $5,500. This year, over 2,300 Detroit properties are likely to be foreclosed for less tax debt than that, according to a June dataset from the Wayne County Treasurer.

Another company, Ace 5 Investments LLC, has Principal Residence Exemptions for four properties in Detroit, saving it nearly $600 each year. More than 70 properties are likely to be auctioned this year for less tax debt than that in 2019.

The Assessor’s Office has the authority to investigate the legitimacy of a PRE and deny it if there appears to be a change in occupancy. However, it does not often exercise that authority.

“There are only occasional instances when the city itself will become aware through other means of a PRE that needs to be canceled and the city does cancel,” Horhn said in an email. “However, we don’t specifically track this.”

The city’s own data contains red flags it could use to improve PRE compliance. State auditors often deny a PRE when the taxpayer has a company name, but an Outlier analysis of assessor PRE data shows nearly 150 Detroit property owners are LLC’s. The data also shows over 200 active PREs on properties owned by the Detroit Land Bank Authority.

In each year since 2015, Wayne County has had a rate of state PRE denials that is disproportionate to its population, according to data from the state treasurer. For instance, in 2016, Wayne County only made up about 20 percent of the population that was in audited counties, but it was responsible for 46 percent of the denials.

Under state law, PRE denials can be retroactive—meaning taxpayers can be on the hook for previous years’ debt, plus interest and fees—but only up to three years.

The state treasury has not tried to quantify how much tax money the city of Detroit has missed because of bad PREs, a state spokesperson said in an email. Wayne County is one of several that the state is required to audit every year, and its audit methodology is confidential.

The state audits since 2015 alone have allowed Wayne County to try to collect nearly $11.5 million in wrongful PRE debt, and nearly 80 percent of that has been paid, according to a spokesperson for the county treasurer.

Oakland County, second only to Wayne County in the state for population, has had disproportionately low rates of state PRE denials in part because of a more hands-on approach, according to Ann Grady, the chief of equalization.

Every year, the Oakland Equalization Office reviews property transfer documents and contacts property owners if they haven’t submitted a form to rescind their PRE—a process that helps explain their lower rates of state audit interventions.

The Detroit Assessor’s Office does not have a similar process to proactively identify wrongful PRE’s, according to Horhn.

The quality of publicly available data makes it challenging to evaluate whether or not the Assessor’s Office is correctly granting and denying tax benefits.

In fact, until Outlier reporters contacted the city to request comment, the Detroit assessor’s online data suggested the city gave over $40 million last year alone in PREs to homeowners who had a different mailing address from the property they claimed was their primary residence.

For organizations who relied on this data, those inaccurate PRE figures were disturbing.

Jim Dwight of Detroit Eviction Defense uses the assessor’s data to research property owners. He noted that many landlords appeared to be receiving the exemption for properties they not only didn’t occupy, but from which they were evicting tenants.

“When we investigate housing, we want to get all the facts,” said Dwight. If Detroit Eviction Defense gets those facts wrong, he later explained, it could undermine the legitimacy of their work and tenants’ arguments.

“We assume—we all do—that the city’s info is correct,” Dwight said.

For Martin, the resident whose landlord claimed a PRE they were not entitled to, the city’s flawed PRE enforcement has lasting impact. Buying the property from foreclosure would have made her a first-time homeowner, and she wouldn’t have to pull her kids from school or lengthen her commute.

“It’s hard to relocate,” Martin said. But she is also reluctant to work with a new owner of her current house, having lost trust that a landlord would be responsive and responsible.

“It’s all good in the beginning and as time goes on, they show up less and less, but only when it’s time to collect the rent,” she said.