Supreme Court Hears Property Tax Home Equity Dispute

Property taxes and home equity are in the news because the U.S. Supreme Court heard arguments in a case involving the sale of a  94-year-old Minnesota woman’s home for overdue property taxes. The court’s ruling in Tyler v. Hennepin County will be important for millions of homeowners across the United States. 

• More than a dozen states can seize your home and sell it to cover your property tax bill while pocketing the profit from your surplus home equity. 
• The Supreme Court will decide whether that approach violates the U.S. Constitution’s 5th Amendment guarantee of just compensation or the 8th Amendment ban on excessive fines.

Property Taxes and Home Equity at the Court

Home equity is essentially your home's current market value, minus what you owe on the property. Home equity is valuable for millions of homeowners nationwide. That’s mainly because the greater your home equity, the more money you potentially have to use now or later through investment, a refinance, or a home sale. But property taxes, which are rising in many states and are a significant expense for many homeowners, are also important for states and localities. Property tax revenue is often used to support critical state infrastructure and services.

The U.S. Supreme Court heard arguments in a case about property seizure, property taxes, and home equity. Tyler v. Hennepin County involves the former home of Geraldine Tyler, a 94-year-old woman who failed to pay $15,000 in property taxes (including interest and penalties) on her Minnesota condominium. 

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• Hennepin County, Minnesota confiscated Tyler’s property in accordance with its tax lien on the condo.
• The condo sold at auction for $40,000.
• The county kept the $25,000 "profit" on the home, (a practice known as surplus retention). The Pacific Legal Foundation represents Tyler, and calls the retention of the $25,000, “home equity theft.” 

What is Tyler arguing? Geraldine Tyler admitted that she failed to pay the property taxes on the condo despite repeated notices from the county that she could lose her home. (Tyler, who had purchased the condo in 1999, moved into an assisted living center in 2010). The property taxes were unpaid for a number of years for a total of $15,000. But Tyler argues that after the state sold her home, the profit from that sale (her home equity) should have been returned to her. To take that surplus money, Tyler’s lawyers argue, is unconstitutional. 

The Fifth Amendment to the U.S. Constitution provides a guarantee of just compensation when the government takes a property interest from a citizen. And if the “taking” of her home equity doesn’t violate the 5th Amendment, Tyler argues that the $25,000 surplus, retained by the county, is essentially an excessive fine prohibited under the 8th Amendment.

What does Minnesota say? Hennepin County argued that Tyler didn’t “own” the equity in her home because she had a mortgage on the property and that in any case, it acted in accordance with state law when it retained the surplus funds from the sale of Tyler’s condo.

Several states allow so-called “surplus retention,” which essentially allows the state to pocket the funds from the sale of the home at auction above a homeowner's unpaid property tax amount. Some states with surplus retention laws similar to Minnesota include Alabama, Arizona, Colorado, Illinois, Maine, Massachusetts, Nebraska, New Jersey, New York, Oregon, and South Dakota.

What about the Supreme Court? During oral arguments, Justice Elena Kagan wondered about the limits on surplus retention, “Take a $5,000 tax debt on a $5 million house. And the state says, 'Thanks, we'll keep it," Kagan said. Other justices, both liberal and conservative, seemed inclined to support the idea that surplus retention of Tyler’s home equity may violate the Constitution. 

Which State Has the Highest Property Taxes? 

The Tyler v. Hennepin County case came to the Supreme Court as many homeowners see higher property taxes. Data show that last year, property taxes increased more than 3.5% and that the average tax on a single-family home in the U.S. was just under $4,000. State and local taxes continue to be among the largest tax bills people pay in the U.S.

Which states have the highest property taxes depends on which factors you’re looking at, e.g., the property tax rate, the market value of the property, the assessment ratio used, and/or the average annual property tax paid in the state. But historically, people in New Jersey, Illinois, New Hampshire, Connecticut, Vermont, and Texas pay relatively high property taxes. 

In contrast, property taxes have been relatively low in Hawaii, Alabama, Louisiana, Nevada, and Colorado.