The U.S. Supreme Court1 has agreed to review a Michigan tax foreclosure case next term that could redefine the limits of government power in seizing private property to collect unpaid taxes. At issue is whether the state violates the Fifth Amendment’s Takings Clause when it sells a home to satisfy a tax debt and keeps the surplus as a windfall, particularly when compensation is tied to the property’s depressed auction price rather than its fair market value. The court will also consider whether the forfeiture of property worth far more than the alleged tax debt amounts to an excessive fine under the Eighth Amendment, especially when the underlying debt may never have been owed.
Michigan law allows homeowners to claim a Principal Residence Exemption (PRE) that exempts their primary residence from local school district taxes. In the underlying case to be heard by the court, the homeowner received this exemption until his death in 2004. His widow and son continued living there, and the PRE remained in effect for several years.
In 2010, the township assessor retroactively denied the PRE for 2007–09, claiming that a new affidavit was required after homeowner’s death. The Michigan Tax Tribunal disagreed, holding that the property still qualified for the exemption because the family continued to reside there. Nevertheless, the assessor later revoked the PRE for 2012, sparking another round of unpaid taxes that led to tax foreclosure proceedings.
The property was ultimately foreclosed and sold in 2015 for $76,008, while the outstanding tax debt was only $2,241.93. The county kept the entire sale amount, including the surplus.
The family brought a federal lawsuit challenging the foreclosure under the Fifth Amendment (Takings Clause) for loss of excess proceeds, and Eighth Amendment (Excessive Fines Clause) for loss of purported fair market value, and Fourteenth Amendment (Due Process and Equal Protection Clauses) claiming the county assessor treated him differently from other property owners, along with a conspiracy claim under 42 U.S.C. §1983 alleging that the county assessor conspired to deprive him of due process by wrongfully denying the PRE and proceeding with foreclosure.
The trial court ruled in the family’s favor on the Takings Clause claim, holding that the county owed him the surplus proceeds from the tax sale plus interest. However, it dismissed all other claims. Both sides appealed.
The Sixth Circuit Court of Appeals2 affirmed the trial court’s judgment reaffirming that when a county sells foreclosed property at public auction, the owner is entitled only to the surplus sale proceeds, not the property’s fair market value.
The Supreme Court’s forthcoming decision could mark a pivotal moment in defining the constitutional boundaries of government authority in property tax enforcement. At its core, the case asks whether state and local governments may constitutionally retain the surplus value of a foreclosed property sold to satisfy relatively small tax debts; an issue that sits at the intersection of property rights, due process, and the limits of governmental power.
A ruling in favor of the homeowner could greatly strengthen property rights under the Fifth Amendment’s Takings Clause by confirming that the government cannot keep more than what is owed in taxes. Such a decision would require states to return surplus sale proceeds to former owners and could force major reforms in states that currently permit “home equity theft,” including Michigan, Minnesota, Oregon, New York, Alabama, Arizona, Colorado, Illinois, Maine, Massachusetts, Nebraska, North Dakota, and Wisconsin. It might also lead to a surge of restitution claims from former homeowners whose excess equity was previously taken.
If the court also recognizes that forfeiting property worth more than the tax debt violates the Eighth Amendment’s Excessive Fines Clause, it would extend protections against excessive penalties to civil tax cases and raise new concerns for local governments about potential limits on their tax collection powers.
Conversely, if the Supreme Court upholds the Sixth Circuit’s narrower interpretation, that property owners are entitled only to surplus proceeds but not to fair market value compensation, it would preserve the government’s wide discretion in handling tax sales and limit federal court involvement. This outcome would keep current practices in place but likely fuel ongoing debate over whether local tax foreclosure laws are fair and proportionate.
Either way, the decision will likely clarify the balance between the state’s power to collect taxes and the individual’s right to retain the equity value of their home, a balance with profound implications for homeowners, local governments, and property law nationwide.
Our team is constantly monitoring this topic. If you have any questions or would like to learn more about Weltman’s real estate default solutions, please connect with Shareholder Ben Hoen at any time.
This blog is not a solicitation for business, and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.
