Supreme Court Has Chance To End Home-Equity Theft

January 20, 2023
January 20, 2023

Home equity—the difference between a home’s value and its remaining mortgage—takes time to accrue but is a major source of wealth for many Americans. According to the latest Survey of Consumer Finances, primary residences account for 26% of the average household’s assets. While no asset is completely safe, in some states home equity faces a unique threat—confiscation by local governments. This spring, the U.S. Supreme Court will decide if this practice is constitutional.

Home equity is a useful asset. It can be borrowed against in the form of a home equity loan or turned into cash when the home is sold. If the seller subsequently buys a cheaper home, the money remaining from the previous sale can be used elsewhere, such as living expenses in retirement, buying a car, taking a vacation, or sending a kid to college.

Like other assets, home equity should be protected from unjust government seizure. This is not the case in some states, but that may change soon. Last week, the U.S. Supreme Court decided to hear a collection of cases involving what is often called home-equity theft. In one case, Geraldine Tyler of Minnesota owed back taxes on a condo she was no longer living in. When the taxes, penalties, and fees hit $15,000, Hennepin County seized the condo and sold it to collect their money.

There is nothing illegal about this and sometimes it is appropriate for government to seize property to settle tax debts. But what is unsettling about this case is that after Hennepin County officials sold the condo for $40,000, they kept all the proceeds rather than take the $15,000 that was due and return the rest to Ms. Tyler. Taxes due should be paid, but government should not be able to seize a home, sell it, and keep the proceeds above what it is owed.

Examples of this behavior are not uncommon. In addition to Minnesota, 12 other states allow home-equity theft, including New York, Illinois, Alabama, and Nebraska. Others, such as Ohio, California, and Texas, technically ban it but have loopholes that enable local governments to do it in some cases (see map below where red states allow home-equity theft, green states have loopholes, and yellow states prohibit home-equity theft).

The Pacific Legal Foundation (PLF), which is representing Ms. Tyler in her case, estimates that from 2014 to 2021 at least 7,900 homes and nearly $800 million in home-equity was seized by local governments.

While home-equity theft seems like an obvious affront to justice, legal arguments must be won to rid us of the practice. In Ms. Tyler’s case, PLF is arguing that home-equity theft violates the Takings Clause of the 5th Amendment that requires the government to provide just compensation when taking private property for public use. Home-equity is an asset like any other, and if the government is going to seize a person’s assets—in this case her equity above what is owed—then the government must pay fair compensation. Many states, including Florida, Utah, New Hampshire, and Vermont, seem to understand this logic and only keep the money that is owed to them.

A second argument, put forth by the National Taxpayers Union Foundation in its amicus brief, is that home-equity theft violates the Excessive Fines Clause of the 8th Amendment. Supreme Court precedent says that a fine cannot be “grossly disproportional” to the offense and that government action must be “purely remedial”. It seems obvious that taking $40,000 to satisfy a $15,000 debt—more than double what is owed—is grossly disproportional and hardly remedial.

Predicting Supreme Court decisions is difficult, but in this case the Court has an easy choice to make. It is hard to imagine anyone siding with the government after reviewing the relevant facts. The thousands of people who had their home-equity stolen from them by governments over the years will never receive the compensation they deserve, but hopefully their excessive punishments will finally lead to a ban on home-equity theft once and for all.

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  • Chuck Parsons

    Chuck is Score LA’s Executive Director of Events and Marketing. He aims to help business owners and would-be entrepreneurs in Los Angeles improve their business practices.

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