Home equity theft: Can the government take more than it’s owed?

If you owe the government $100 in property taxes, should they be able to take thousands or even hundreds of thousands more than what you owe? 

That’s the essence of Tyler v. Hennepin County, a case that will be argued before the Supreme Court on April 26. The case concerns Geraldine Tyler, a 94-year-old grandmother from Minnesota who lost her home to equity theft, a scheme that allows local governments to take all the value of a home as payment for much smaller property tax debts. 

Hennepin County officials seized Tyler’s home over $2,300 in unpaid property taxes and $12,700 in interest, penalties and fees. The county then sold the home for $40,000 and kept the $25,000 windfall, leaving her with nothing. Represented by my firm, Pacific Legal Foundation (PLF), Tyler is asking the Supreme Court to vindicate her property rights.  

Unfortunately, her case is not a fluke; about a dozen states and Washington D.C., allow home equity theft. 

In these states, when a homeowner fails to pay or underpays their property taxes, local governments place a lien on the home. If the taxes remain unpaid, the government forecloses and takes absolute title to the home. In some of these states, local governments pad their budget with the stolen surplus. In others, local governments sell the lien to private investors just for the amount of the tax debt, allowing them to keep as profit the homeowners’ equity.  

Both local governments and private investors frequently make substantial profits from home equity theft. A recent study by PLF found that from 2014-2021, local governments took at least 8,950 homes. Homeowners lost around $860 million and, on average, 86 percent of the value of their home.  

And it only gets worse from there. We only examined a small number of the local jurisdictions that allow home equity theft, but as the saying goes, where there’s smoke there’s fire.  

Because of the confusing and predatory nature of the process, the most common victims of home equity theft are the elderly, the sick, cognitively impaired, and poor. Some lose their homes and equity over shockingly low amounts of tax debt. Take the case of Uri Rafaeli, who lost everything because he mistakenly underpaid his taxes by a mere $8.41. After taking and selling his home, Oakland County, Mich., made nearly $24,500. Fortunately, the Michigan Supreme Court later struck down the state’s home equity theft law.

Now, governments that employ this practice sometimes argue that the people who lost their equity deserve it because they did not pay their property taxes. However, most of the homeowners with whom PLF has worked did not intentionally shirk their tax obligations. And the foreclosure process is so complex that many did not understand it. In fact, many people think the notices from the government telling them they may lose their homes are a scam. 

Sometimes local governments don’t give sufficient notice. Some homeowners reported that their local governments didn’t notify them or only notified them once. In any case, even if homeowners are properly notified and aware of the debt, that doesn’t mean the government can take more than what is owed. 

Not only is home equity theft unfair, but it also violates the Constitution. Although property taxes must be paid, the Fifth Amendment prohibits the government from seizing private property without “just compensation.” That includes hard-earned equity in a home.  

Hopefully, the Supreme Court will end this unjust, unconstitutional practice. If it doesn’t, state legislatures should follow the example of  Montana, North Dakota and Wisconsin, which all banned the practice legislatively. 

People should pay their property tax debts, but the government shouldn’t profit from their misfortune. 

Duncan Schroeder is a research assistant at Pacific Legal Foundation, a nonprofit legal organization that has defended Americans’ liberties when threatened by government overreach and abuse for the last 50 years.