Who Benefits from the Supreme Court ‘Home Equity Theft' Ruling?

foreclosure sign for home equity theft case

(Image credit: Getty Images)

published 30 May 2023

A 94-year-old woman who lost her home — and her home equity — due to past-due property taxes scored a huge win at the U.S. Supreme Court.

In the case, Tyler v. Hennepin County, a unanimous Court ruled that it’s unconstitutional for a state to take your home to cover your property tax bill while pocketing the profit from your surplus home equity.
Since more than a dozen states allow what some call “home equity theft,” the court’s ruling will impact homeowners across the country.

Writing for the Court, Chief Justice John Roberts pointed to “history and precedent” saying that “while the County had the power to sell Tyler’s home to recover the unpaid property taxes, it could not use the tax debt to confiscate more property than was due.”

Christina Martin of the Pacific Legal Foundation who argued Tyler’s case before the Supreme Court, welcomed the ruling. In a release, Martin said, “The Court’s ruling makes clear that home equity theft is not only unjust but unconstitutional.”

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Property taxes and “home equity theft”

This legal challenge began with property taxes, a fact of life for millions of U.S. homeowners. If you don’t pay the property tax due on your home, you can ultimately risk losing your property. 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.

As Kiplinger previously reported, in this case, Geraldine Tyler owed $15,000 in property taxes on her Minnesota condo, which she had lived in for more than ten years before moving into a senior assisted living community. After failing to collect the property tax debt from Tyler, Hennepin County, Minnesota, sold Tyler’s home at auction for $40,000.

But rather than return the remaining $25,000 to Tyler, the county kept the surplus home equity. Tyler sued, arguing that retaining the surplus from the sale of her home violated the Fifth Amendment of the U.S. Constitution and that it was also an unconstitutionally excessive fine. Hennepin County argued that Tyler didn’t have a property interest in her home equity and that it followed state law in retaining the surplus funds from the sale of her condo.

The U.S. Supreme Court agreed with Tyler and unanimously ruled that the County had “effected a classic taking in which the government directly appropriates private property for its own use.”

What is a “taking”? The Fifth Amendment to the Constitution prohibits the government from taking property without just compensation. So, under the law, a “taking” is when the federal government takes private property and converts it for public use. “Just compensation” under the law, is a fair and reasonable amount — with a home for example, just compensation might be the property's fair market value.

What Tyler v. Hennepin means for homeowners

The court noted in its ruling that “most states and the federal government require excess value to be returned to the taxpayer whose property is sold to satisfy an outstanding tax debt.” However, about a dozen states can take and sell your home to cover your property tax bill while pocketing any profit from your surplus home equity.

Note: Home equity is essentially your home's current market value, minus what you owe on the property. The greater your home equity, the more money you potentially have to use now or later through investment, a refinance, or a home sale.

So, this ruling will likely force certain states and localities to change their retention approaches or potentially face litigation and liability. The Pacific Legal Foundation cites data showing that U.S. homeowners “lost more than $860 million in life savings on more than 8,950 homes.”

Which states retain home equity?

States that currently retain the surplus equity in your home are Arizona, Oregon, Colorado, South Dakota, Minnesota, Nebraska, Illinois, Alabama, New York, New Jersey, Maine, and Massachusetts. The practice is also allowed in the District of Columbia.

According to Pacific Legal Foundation, states that allow “home equity theft” in certain situations include Montana, Idaho, Nevada, California, Alaska, Texas, Wisconsin, Ohio, and Rhode Island.

Note: While Tyler prevailed at the Supreme Court, the case also serves as a reminder to pay your property taxes on time if you can. Not paying property taxes can lead to a tax lien on your home or in some cases, home foreclosure.

As the senior tax editor at Kiplinger.com, Kelley R. Taylor simplifies federal and state tax information, news, and developments to help empower readers. Kelley has over two decades of experience advising on and covering education, law, finance, and tax as a corporate attorney and business journalist.