WASHINGTON – Every homeowner pays property taxes. At least, they should. But sometimes, people can’t – or won’t – pay the piper, and the tax collector comes calling.
Local taxing authorities can take your house and sell it to obtain their due. But if the house fetches more than what you owe, the Supreme Court has now ruled that the authorities can’t keep the difference.
That’s contrary to the rules in more than 20 states, which allow what the nonprofit Pacific Legal Foundation (PLF) calls “home equity theft.” A dozen states and the District of Columbia allow tax collectors to keep everything they can get for your place, even if you owed far less, and nine others permit it under certain circumstances.
But in a rare unanimous ruling, the nation’s top court has put the kibosh on the practice.
“The taxpayer must render unto Caesar what is Caesar’s, but no more,” wrote Chief Justice John Roberts in his opinion on Tyler v. Hennepin County, noting that the practice violates the takings clause of the Fifth Amendment.
Now, warns PLF’s Jim Manley, if the offending jurisdictions don’t change their laws, “they could face damages in the millions in future lawsuits.”
The National Association of Home Builders (NAHB) and the National Association of Realtors (NAR) both filed amicus briefs for the case, and both celebrated the decision.
“No longer can localities seize windfalls on the excess proceeds from tax sales,” said the NAHB in a statement on its website.
PLF, which has been fighting equity theft for years, brought the case to the high court on behalf of 94-year-old Geraldine Tyler, who owned a small one-bedroom apartment in Hennepin County, Minnesota. After moving to an assisted living facility, she fell behind on her property taxes to the tune of $2,300 – plus $12,700 in penalties.
The tax collector pounced: The county seized the apartment, sold it for $40,000 and kept every dollar – a difference of $25,000, give or take. Pure gravy for the county.
But the Supreme Court ruled that when the government takes someone’s home equity to satisfy a property tax debt, it violates the takings clause, which bars the government from snatching private property without providing just compensation.
Writing for the 9-0 decision, Roberts said, “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.”
And in a concurring opinion, Justice Neil Gorsuch, joined by Justice Ketanji Brown Jackson, wrote that the practice may also violate the Constitution’s excessive fines clause, which limits the amount governments can take as punishment.
“Economic penalties imposed to deter willful noncompliance with the law are fines by any other name,” Gorsuch wrote. “And the Constitution has something to say about them: They cannot be excessive.”
In its ruling, the court rejected the county’s argument that since Tyler had not paid her property taxes, she had effectively abandoned her apartment and had no right to the excess proceeds. But Roberts wrote that the county cannot frame her failure to pay as abandonment.
PLF attorney Christina Martin hailed the decision as “a major victory for property rights.”
“This decision affirms that property rights are fundamental and don’t depend solely on state law,” said Martin, who argued Tyler’s case pro bono. “The court’s ruling makes clear that home equity theft is not only unjust, but unconstitutional.”
Tyler’s case will now go back to a trial court, where Martin will argue that she is owed the fair market value of her condo, minus her debt, as just compensation.
Meanwhile, PLF’s battle to end home equity theft is moving to state legislatures, which have been put on notice to change their practices or face liability in future lawsuits. The nonprofit has even provided guidelines and model policies to help states reform their laws.
The 12 states identified by PLF that currently allow the practice (along with Washington, D.C.) are Alabama, Arizona, Colorado, Illinois, Maine, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon and South Dakota. The nine that allow it in limited circumstances are Alaska, California, Idaho, Montana, Nevada, Ohio, Rhode Island, Texas and Wisconsin.
Recently, North Dakota saw the light, changing its law to ban equity theft. Montana and Wisconsin have outlawed most such takings, but still have loopholes, PLF says.
In its brief, NAHB argued that state law cannot be used to circumvent traditional property interests. Both English and American common law require governments to return any surplus – so-called remainder equity – from property taken to pay debts, said Zach Packard, NAHB staff counsel.
In its own brief, NAR agreed: “Permitting the government to erase these vested property rights by the stroke of a pen undermines a core premise of property ownership.”
© 2023 Miami Herald. Distributed by Tribune Content Agency, LLC. Lew Sichelman has been covering real estate for more than 50 years.