This article explains the May 25 Supreme Court decision involving property tax foreclosures, sets out the broad implications of the ruling in states other than just Minnesota, explains rights where a process to recover a surplus after foreclosure exists but is not meaningful, and discusses the proper amount of compensation due to the homeowner. This article also examines the ruling's implications for constitutional excessive fines challenges, for takings involving abandoned property, and for threatened tax foreclosure that will not result in confiscation of a surplus.
The article then lists ten practical tips to avoid loss of a home for unpaid property taxes, plus an eleventh tip on unpaid property taxes when the home is tied up in probate. The article concludes with a link to an NCLC site that contains a number of additional resources on property taxes and tax foreclosures.
The Supreme Court Ruling
On May 25, the Supreme Court held in Tyler v. Hennepin, 2023 WL 3632754, that when a local government takes a home at a property tax foreclosure and keeps the homeowner’s equity after the tax debt is paid, it violates the Takings Clause of the Fifth Amendment to the United States Constitution.
The petitioner, Geraldine Tyler, is 94 years old. After moving out of her home and into a senior community, she fell behind on her property taxes. The Hennepin County taxing authority began the tax collection process and this resulted in a conditional taking of her property, subject to a three-year redemption period. When Ms. Tyler failed to redeem the property by paying the outstanding taxes, interest, and penalties in the amount of $15,000, absolute title to the property transferred to Hennepin County. The County then sold Ms. Tyler’s home for $40,000 and kept the $25,000 sale proceeds. Minnesota law provided no right or procedure for Ms. Tyler to recover the surplus equity, which is the difference between the total amount owed on the tax debt and the value of the property at the time full ownership was transferred.
Surplus Equity Is a Property Interest Subject to Takings Clause
The Takings Clause of the Fifth Amendment, which is applicable to the states through the Fourteenth Amendment, provides that “private property [shall not] be taken for public use, without just compensation.” An initial issue was whether the surplus equity in Ms. Tyler’s home was property subject to the Takings Clause.
While Minnesota law recognizes an individual’s right to own real property such as house, and related financial interests in that property such as home equity, a law enacted in 1935 provides that a homeowner forfeits these property interests when she falls behind on property taxes and loses the home at tax foreclosure. The statute gives the taxing authority a windfall by permitting it to keep any value in the property that exceeds the tax debt. In ruling against Ms. Tyler on her takings claim, the Eight Circuit held that the 1935 windfall statute abrogated any common-law right to surplus equity and established that Ms. Tyler did not have a property interest subject to the Takings Clause. Tyler v. Hennepin Cnty., 26 F.4th 789 (8th Cir. 2022).
The Supreme Court found this analysis of Ms. Tyler’s interest in the surplus equity to be too limiting and held that a state statute cannot be the only source of a property interest subject to the Takings Clause. Otherwise, states could easily “‘sidestep the Takings Clause by disavowing traditional property interests’ in assets it wishes to appropriate.” 2023 WL 3632754, at *4.
Looking at history and precedent, the Court noted that the practice under English law as far back as the Magna Carta, adopted by the majority of the original thirteen states, established that while a government can sell an individual’s home to recover unpaid property taxes, it could not use “the toehold of the tax debt to confiscate more property than was due.” 2023 WL 3632754, at *4. This principle of returning any surplus to the property owner was also the majority view among the states when the Fourteenth Amendment passed.
Based on this history and the Court’s own precedent, the Court held that an owner’s right to surplus equity following a tax foreclosure is a well-established property interest that cannot be taken by the government without just compensation. The Court stated that a “taxpayer who loses her $40,000 house to the State to fulfill a $15,000 tax debt has made a far greater contribution to the public fisc than she owed. The taxpayer must render unto Caesar what is Caesar’s, but no more.” 2023 WL 3632754, at *8.
Broad Implications Beyond Minnesota
Because this fundamental right to surplus equity is not founded solely in state law and cannot be taken away by enactment of a state statute, the Court’s decision means that state and local tax foreclosure schemes similar to Minnesota’s are subject to constitutional challenge. Ms. Tyler’s petition for certiorari asserted there were fourteen other states with windfall statutes: Alabama, Arizona, California, Colorado, Illinois, Ohio, Oregon, Maine, Massachusetts, Minnesota, Montana, Nebraska, New Jersey, and New York (it was noted that California and Ohio retain surplus only when the property is sold for public use). The Court did not identify these states in the opinion but did note, apparently relying upon the petition, that thirty-six states and the federal government adopt the majority view and require that surplus equity be returned to the owner. 2023 WL 3632754, at *5.
As discussed in NCLC’s Home Foreclosures Chapter 16, and the summaries of state tax foreclosure laws found in that treatise’s Appendix G, there may be several different procedures within the same state for conducting a tax lien foreclosure, and these procedures may be used for collecting other municipal liens such as those for water and sewer bills. Depending upon the particular procedure used by the local municipality, the owner may or may not have an opportunity to recover surplus equity.
Given the varying procedures within a particular state, the estimate of fourteen states underestimates the number of windfall tax foreclosure schemes that may be subject to challenge. For example, Rhode Island was not included in the fourteen windfall states no doubt because it has a statute that permits the owner to recover a surplus. R.I. Gen. Law § 44-9-37. However, that statute is almost never invoked because it does not apply to the tax foreclosure process most commonly used in the state. Other states having tax foreclosure schemes that may result in the owner being deprived of an opportunity to recover lost equity include at least the following: Alaska, Delaware, Idaho, Louisiana, Mississippi, Montana, Nevada, Rhode Island, South Dakota, and Wyoming.
Another factor suggesting broader application of the decision is that some of the thirty-six states that purportedly provide for recovery of surplus equity actually provide for recovery of surplus sale proceeds following a public auction. This distinction between surplus equity and surplus proceeds is discussed below and in NCLC’s Home Foreclosures § 18.104.22.168.
The decision is not limited to the foreclosure process used in Minnesota in which the local government acquires the property without a public auction, referred to as “strict foreclosure.” In many states, the tax foreclosure process begins with the local municipality conducting a tax sale in which private parties purchase either a tax lien certificate or a tax deed to the property, which provides the purchaser with conditional title to the property subject to the homeowner’s right of redemption.
This initial tax sale auction typically does not generate surplus sale proceeds because the bidding process is not competitive—it is based on the amount of taxes owed and not the value of the property. The proceeds are used to pay off the tax debt along with all fees, interest, penalties, and costs to the municipality. If the homeowner does not redeem during the specified period, the purchaser can then initiate a process to obtain absolute title to the property, stripping the homeowner of all interest in the home. This final foreclosure of the owner’s redemption right by the purchaser is the taking for purposes of the Takings Clause. While this final step may be initiated by the private purchaser, it is nevertheless part of the overall tax foreclosure process conducted by the local municipality, making the government entity responsible for paying just compensation to the owner for the taking.
What If the Right to Surplus Equity Exists but Is Not Meaningful?
In arguing that Minnesota law afforded Ms. Tyler an opportunity to avoid the loss of her equity, Hennepin County relied upon an earlier Supreme Court decision, Nelson v. City of New York, 352 U.S. 103 (1956). In Nelson, a New York City ordinance that permitted foreclosure for unpaid water bills gave the property owner two months after the city initiated foreclosure to pay off the tax debt, and an additional twenty days to ask for the surplus from any tax sale. The Court in Nelson found no Takings Clause violation “[b]ecause the New York City ordinance did not ‘absolutely preclud[e] an owner from obtaining the surplus proceeds of a judicial sale,’ but instead simply defined the process through which the owner could claim the surplus.” 2023 WL 3632754, at *7. Hennepin County argued that the Minnesota scheme afforded a similar opportunity by giving Ms. Tyler a three-year redemption period during which she could voluntarily sell her home and avoid the loss of her equity.
The Court distinguished Nelson, noting that Minnesota provides no opportunity for the taxpayer to recover the surplus equity. Moreover, the Court held that a pre-foreclosure redemption period is not the equivalent of a process to recover the surplus once the property has been taken. 2023 WL 3632754, at *7 (“requiring a taxpayer to sell her house to avoid a taking is not the same as providing her an opportunity to recover the excess value of her house once the State has sold it”). This suggests that other laws requiring a homeowner to take certain steps before the absolute transfer of the property in order to obtain the surplus, such as filing a notice or response within a specified period during the pre-foreclosure period, may not provide the requisite opportunity for the taxpayer to recover the surplus equity.
The decision also leaves open the question about whether advocates can argue there is a Takings Clause violation:
- If state law has a post-foreclosure process to recover surplus equity, but that right is effectively nonexistent because there are so many barriers to accessing the process;
- If state law provides a right to recover surplus equity, but the statute does not set out a procedure for the owner to access the surplus and local municipalities have not implemented any procedures.
What Is the Proper Amount of Compensation That Is Due?
The Supreme Court did not address the critical question of how “just compensation” should be calculated in tax foreclosure cases. The lower courts in Tyler also had not dealt with the issue because the Takings Clause claim was dismissed. While Hennepin County eventually sold the property for $40,000, no court had ruled that this was the property value that should be used for determining the surplus equity or proper compensation.
The Supreme Court has held that just compensation is generally determined as of the date of the taking. United States v. 564.54 Acres of Land, 441 U.S. 506, 511 (1979). In a tax foreclosure case, this is the date when absolute title to the property is transferred from the homeowner to the government or private purchaser.
The Court has also held in takings cases that the constitutional requirement is premised on the principle of indemnity, that the amount of compensation is “measured by the property owner’s loss rather than the government’s gain.” Brown v. Legal Found. of Washington, 538 U.S. 216, 235–236 (2003). The private party “is entitled to be put in as good a position pecuniarily as if his property had not been taken. He must be made whole but is not entitled to more.” Olson v. United States, 292 U.S. 246, 255 (1934). Thus, the homeowner’s remedy should be an award of damages based on the difference between the value of the property and the total tax debt owed to the government.
In condemnation cases involving real property, the Court has stated that courts generally have found that the owner is entitled to the “market value” or the “fair market value” of the property, United States v. Miller, 317 U.S. 369, 374 (1943), and that the owner has the burden to establish this value. United States ex rel. TVA v. Powelson, 319 U.S. 266, 273 (1943). In cases in which a Takings claim is brought some time after the tax foreclosure, the homeowner will likely need to obtain a retrospective appraisal of the property to prove the value as of the date of the taking.
In states where the final stage of the tax foreclosure process involves a public auction of the property to the highest bidder, local municipalities will likely argue that just compensation should be the amount of the surplus proceeds, that is the difference between the total taxes owed and the auction sale price. This amount could be considerably less than compensation measured by the property’s fair market value. Such arguments should be rejected given that the Tyler Court unambiguously held that a homeowner is entitled to recovery of compensation based on the equity lost as a result of the taking.
Did Hennepin County Also Violate the Excessive Fines Clause?
Ms. Tyler alternatively argued that her loss of the surplus equity in the tax foreclosure proceeding was a monetary sanction that violated the Eight Amendment Excessive Fines Clause, which is an incorporated protection applicable to the states under the Fourteenth Amendment Due Process Clause. In order to be subject to the limitations of the Excessive Fines Clause, a monetary sanction can arise in a civil proceeding, but its purpose must be at least partially punitive. The Court previously held that a statutory scheme has some punitive purpose if it does not serve purely remedial purposes. Austin v. United States, 509 U.S. 602, 621, (1993). See also NCLC’s Home Foreclosures § 22.214.171.124.
Because Ms. Tyler was successful on her Takings claim, the Court did not decide whether she also alleged an excessive fine under the Eighth Amendment. However, two justices (Gorsuch and Jackson) filed a concurring opinion detailing why the district court in Tyler had incorrectly held that the Minnesota tax foreclosure scheme is not punitive. This concurrence is a must read for attorneys wishing to pursue an excessive fine claim in cases where a takings claim may not be viable.
What About Abandoned Property?
Issues related to property tax foreclosures, including those resulting from vacant properties, can have a significant impact on local communities. Many local governments have used the tax foreclosure process to help communities avoid problems with abandoned residential properties, often through programs that transfer them through the tax sale process to nonprofits for housing development projects.
The Tyler decision does not rule out the possibility that such programs can continue. However, the local government will need to ensure that the homeowner has truly abandoned the property. Failure to pay the taxes alone will not be sufficient. In rejecting the argument by Hennepin County that Ms. Tyler had constructively abandoned the property, the Court stated that “[a]bandonment requires the ‘surrender or relinquishment or disclaimer of’ all rights in the property,” and that the owner must fail to make any use of the property “for a lengthy period of time.” 2023 WL 3632754, at *7.
Practical Implications of the Supreme Court Ruling
The Supreme Court’s ruling is both highly significant and of limited scope, applying to tax sales where a surplus would be expected. For homeowners that pay into an escrow account on their mortgages, property tax takings are not a common concern. Instead, the mortgage servicer will pay any required property tax and if the servicer is not reimbursed for those payments, the servicer may institute a mortgage foreclosure. Tax takings are more common where a home is free and clear of a mortgage, making older homeowners most at risk of tax foreclosures, often for reasons beyond their control. See AARP and NCLC amicus brief filed in Tyler.
Nevertheless, the Supreme Court’s ruling has broader implications than just where a tax sale produces a surplus. Property tax collectors, no longer receiving a windfall from tax sales and instead facing increased scrutiny of any tax sale, may become more willing to work with homeowners to find solutions short of a tax foreclosure.
10 Ways to Avoid Loss of a Home for Unpaid Property Taxes
The Supreme Court ruling provides some monetary benefit for those losing their home due to a tax taking, but provides little benefit in protecting the home from seizure. The remainder of this article sets out ten strategies that homeowners can utilize to avoid loss of their home for unpaid property taxes. These include ways to reduce the size of current and future bills, compromising on the amount due for past bills, seeking help from a mortgage servicer, contesting a tax sale, setting aside a completed tax sale, and redeeming the property after a sale. The special case where a home is stuck in probate is also considered.
1. Reducing the Tax Bill by Challenging the Assessment
Property taxes can be reduced by successfully challenging a home’s assessment, such as that a home is assessed for more than similar homes in the neighborhood. Assessments for these other homes are a matter of public record at the assessor’s office and may be available online. The initial challenge to an assessment takes place before a local tax board, agency, or company hired by the tax assessor that will have looser procedures and requirements than a court. There are rights to an appeal. Typically, challenges must be made soon after a new assessment or a tax bill. Some states require full payment on the tax bill or at least the amount you are not contesting while the assessment is being challenged.
2. Reducing the Tax Bill Through Abatement, Exemption, and Deferral Programs
Every state has a program to lower or delay property taxes for at least some homeowners—often called abatement, exemption, or deferral programs. Homeowners must apply for these and as a result many eligible homeowners never receive these benefits.
Some states provide relief for disability, low income, or personal status (such as veteran, disabled veteran, firefighter, or police officer). Every state has some kind of relief for older homeowners. Often if a spouse qualifying for relief passes away, the other spouse can continue receiving the relief. Some states let tax assessors grant hardship exemptions for age, infirmity, or indigence. Some relief permanently reduces a tax bill, while others defer the obligation to the future, such as when the home is sold. Some states let older or indigent homeowners perform community service instead of paying taxes.
Often for an application to apply to a current tax bill, the application must be completed shortly after receipt of a tax bill. Even in some states where general information about these programs can be found on property tax bills, applicants may have to push the local tax assessor’s office to grant all relief a homeowner is entitled to, or it may require appeal to a court.
3. Deferred Payment Plans or Compromising on Outstanding Bills
Delinquent property tax obligations will typically lead to penalties and interest. Some (but not all) taxing authorities permit homeowners to catch up on overdue payments in installments while keeping up with new tax bills. Keeping to this revised payment plan prevents additional penalties. The taxing authority in only some states has the power to compromise a debt, by waiving some delinquent taxes or penalties and interest. However, the “compromised amount” may have to be paid in one lump sum.
4. The Mortgage Servicer Riding to the Rescue
A mortgage servicer, even one for a home equity line of credit, has an interest in avoiding a tax sale. The servicer might help by paying any back-taxes with the homeowner repaying that amount over time or through an escrow account it sets up on the mortgage. Failure to repay the servicer can lead to foreclosure on the mortgage.
5. A Chapter 13 Bankruptcy Can Provide Short and Long-Term Solutions
A chapter 13 bankruptcy filing will invoke the “automatic stay” which prevents any tax sale process from continuing. After the automatic stay is in place, a chapter 13 plan can pay the delinquent amount in installments over 36 or even as many as 60 months.
6. Special Rights of Military Personnel
Active-duty military personnel have special protections against tax sales where the home is owned and occupied by the servicemember or the servicemember’s dependents. These protections apply even if a co-owner owes the taxes. Any tax sale must first be approved by a court and the court can stay a tax sale for up to 180 days after the servicemember’s period of active duty ends. Interest on unpaid taxes is limited to 6%, no penalties can be assessed, and, if there is a tax sale, the servicemember can redeem the sale up to 180 days after leaving active duty. (Redeeming the sale is discussed below.)
7. Contesting a Tax Sale
Once the property’s tax bill is seriously delinquent, the taxing authority will begin a process to sell the home to repay the tax debt. In some states, this same process can be used for failure to pay water or sewer bills. Ways to contest a tax sale depend on state law.
Due process challenges may be possible if the notice requirements are insufficient or were not followed, or of all property owners and lien holders were not given proper notice of the tax sale proceeding.
In most states, the taxing authority can proceed with a tax sale just by notifying the homeowner, and there is no judicial proceeding. In that case, the homeowner will have to file a lawsuit to stop the tax sale. Unfortunately, there are few grounds for such a lawsuit. Generally, it is too late to challenge the assessed value of the home. More on contesting a tax sale is found in NCLC’s Home Foreclosures § 16.3.2.
8. Bidding at a Tax Sale
Nothing prevents a homeowner or a family member or friend from bidding at the tax sale, particularly where the sale price is likely to be below market and the homeowner (unlike other bidders) will be familiar with the home’s condition. Of course, a homeowner who cannot pay a property tax bill is unlikely to be able to afford to bid at the tax sale. A lender might in advance agree to fund the purchase with a first lien on the home, particularly where the home is worth significantly more than the mortgage amount. This will allow the homeowner to pay out the past-due property taxes over 10, 20, or even 30 years. For more on obtaining a mortgage to save the home from a tax sale, see #10, infra, concerning redemption of the home following a tax sale.
9. Setting Aside a Completed Tax Sale
Generally, once a tax sale has been completed, it is possible to find grounds to go to court to set aside the sale. The grounds to do this are very limited, generally relating to whether notice was improper or the tax sale was conducted improperly. Typically, low sale price is not a ground for setting aside the tax sale. More on setting aside a tax sale is found in NCLC’s Home Foreclosures § 16.3.3.
10. Redemption Following the Tax Sale
In most states, even after the tax sale has been completed, the homeowner can still redeem the home with a specified period of time, such as one year, but time periods vary by state. In general, there are no time extensions and homeowners generally fare best to redeem as soon as possible. The party purchasing at the tax sale can increase the redemption amount over time at a percentage rate that is often significant.
Redemption requires the homeowner to pay the entire unpaid taxes, penalties, interest, and the costs and expenses incurred by the purchaser at the tax sale. Typically, someone facing a tax sale does not have the cash to make this large lump sum payment. On the other hand, many homeowners facing a tax sale do not have a mortgage on their home. Having a home free of a mortgage may make it possible to borrow the redemption amount with a new mortgage or with a reverse mortgage.
Homeowners should avoid any lender that seeks out consumers whose homes are in a tax sales, which may make matters worse. If a home’s equity is substantially more than the redemption amount, homeowners should be able to obtain a legitimate mortgage loan and avoid predatory lenders by shopping around for the best deal.
The homeowner can also ask the purchaser at the tax sale to pay the redemption amount in installments. But homeowners should be careful of the terms as some speculators purchase homes at tax sales to take advantage of the homeowner’s desire to redeem. They offer homeowners fraudulent sale-leaseback schemes or high-rate loans.
Another option is a chapter 13 bankruptcy and paying the redemption amount in installments on terms the debtor proposes and approved by the bankruptcy court, often spreading the payment out over three to five years.
More on redemption following a tax sale is found in NCLC’s Home Foreclosures § 16.4.
The Special Case Where A Home Is Tied Up in Probate
A surprising number of tax takings involve homes stuck in probate—the homeowner has passed away and title does not yet reside in the successor or successors. The probate process can take years, particularly where there is no will or disputes among the heirs. The deceased may have been behind in paying property taxes and heirs might not realize they should be paying the taxes, or unable to do so because they depended on the deceased’s income.
Much of the advice in this article will be inapplicable. Any benefit from an abatement, exemption, or deferral program may end with the deceased’s death and potential successors will not be eligible to apply for a new program until they obtain title. The taxing authority may not wish to offer a deferment or compromise with parties other than title owners. Mortgage servicers may be unwilling to work with parties who are not even the current property owners, though an heir may gain certain rights in dealing with the servicer if they become a confirmed successor in interest. See NCLC’s Mortgage Servicing and Loan Modifications Chapter 3. Non-owners may not be entitled to redeem the property following a tax sale.
An important option where there is such a “tangled title” is for the likely successor to file a chapter 13 bankruptcy. The broad definition of the bankruptcy estate, which includes contingent and equitable interests, means that a potential heir can use a chapter 13 bankruptcy to stop a tax sale or other creditor action even if a probate or other proceedings have not been completed. Filing the chapter 13 bankruptcy brings the potential heir’s interest in the property into the bankruptcy estate, so that it is protected by the automatic stay. An heir may even be able to use a fraudulent transfer claim in bankruptcy to avoid a final tax sale.
A chapter 13 plan can then pay the arrears in installments, potentially over three to five years. A potential heir should even be able to pay the redemption amount after a tax sale in a chapter 13 bankruptcy. Of course, potential heirs can also bid at the tax sale and may be able to obtain a mortgage to pay for the sale price, since their ownership does not require the probate process because they are buying the home outright.
More resources for consumers dealing with property taxes are found here. Some of these resources are free to the public, some are free to the consumer law community—legal services, NACA, and recent attendees at NCLC conferences. Other resources require a subscription to NCLC’s Home Foreclosures. The same page also links to resources on “tangled titles” including problems with mortgages, property taxes, utilities, disaster assistance and more.