When the government takes your home to collect a tax debt and sells it at auction, how much does it actually owe you?

The Supreme Court has now answered part of that question. And like many tax issues, the answer is complicated.

The Court ruled that when a government fairly conducts a tax sale, the Constitution does not require it to compensate the former owner based on the home’s fair market value. Instead, the constitutional baseline is the auction sale price, minus the tax debt. But that wasn’t a complete win for Isabella County, Michigan. The justices vacated the Sixth Circuit’s ruling against the family and sent the case back for the lower court to consider whether the county’s sale process was fairly conducted in the first place.

The case, Pung v. Isabella County, is the follow up to Tyler v. Hennepin County, the 2023 Supreme Court decision that rejected what critics call “home equity theft.” In Tyler, a 94-year-old Minnesota woman lost her condo over unpaid property taxes. Hennepin County sold the property for $40,000, kept the full amount, and applied only about $15,000 to taxes, penalties, interest, and costs. The Supreme Court unanimously ruled that the county could not keep the surplus.

Tyler established a basic principle: The government can collect taxes, but it cannot use a tax debt as an excuse to confiscate more property than it is owed.

Pung had a variation on that that question: What counts as the surplus?

Timothy Scott Pung bought his family home decades ago. After his death, and later the death of his wife, his son Marc remained in the home with his family. The house had received Michigan’s Principal Residence Exemption, which reduces certain school-tax obligations for qualifying homes. The family believed the exemption continued because family members........

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