California Ends “Home Equity Theft” in Property Tax Foreclosures

California recently made an important change to its foreclosure law.

When California deed holders face foreclosure on liens placed against their titles for unpaid property taxes, they would find themselves losing all their equity. It’s a practice commonly called home equity theft. From October 2025 on, California deed holders will no longer have to face this unfair practice.

Wasn’t This Practice Already Found Unconstitutional?

Yes, it was, in cases heard in state after state. Local governments should not be allowed to seize and sell tax-delinquent properties, and keep all the proceeds, including the surplus over and above the debt.

And yet this has happened to homeowners year after year in California. A deed holder who fell behind on taxes could lose the home and get zero out of the sale, even if it fetched a substantial profit.

Finally, in 2023, in Tyler v. Hennepin County, the U.S. Supreme Court stood by what the Constitution’s Takings Clause has said all along. When the government seizes property on account of an unpaid debt, it cannot keep more than it is owed.

Since 2023, most of the surplus seizure states have changed their laws to direct excess proceeds back into the accounts of foreclosed debtors. But in California, the state’s tax code allowed counties to skip auctions when they conveyed tax-delinquent property deeds to nonprofits or public agencies. Because there were no sale profits, nothing existed to return to the debtor.

Finally, a Resolution in California: Gavin Newsom Signs Assembly Bill 418 Into Law.

In California, hundreds of thousands of homeowners are behind in property tax payments. This puts them at risk of tax liens and potential foreclosures.

But on October 1, the governor signed Assembly Bill 418 into law. The new law will:

• Stop the counties from keeping or conveying deeds based on tax liens, unless the debtor receives compensation.

• Direct foreclosures to auctions.

• Direct any surplus sale proceeds back to the foreclosed debtor.

Counties can still foreclose on their tax liens if the deed holder doesn’t make good on them. But counties may not convey the deeds to homes without a sale. And any equity remaining after the tax lien is resolved must be returned to the former homeowner.

Bottom line: Californians can still lose their homes over unpaid taxes — but at least they’ll be entitled to fair compensation.

According to the Pacific Legal Foundation, the change is long overdue. It’s also a “promising” example of how other states could reform their own laws.

Who Are Geraldine Tyler and Kevin Fair?

Geraldine Tyler and Kevin Fair brought separate, high-profile cases against county surplus retention practices.

In two different states, these debtors lost their deeds. They also lost all the home equity that came out of their homes in the process. Both of these cases highlighted the way a home with a modest tax bill can get buried in penalties and interest, leading to the loss of the home and its entire value.

The legal battles related to the Tyler and Fair foreclosures have come to the attention of the Supreme Court, and they’re resulting in changes nationwide.

Geraldine Tyler’s story played out in Minnesota. As many seniors do, Geraldine left her primary residence to enter an assisted living community — and forgot about property taxes on the condo home she moved out of. In 2015, Hennepin County foreclosed and auctioned off her home. The county kept a surplus of $25,000, over and above the unpaid debt.

The state of Minnesota claimed that the condo home no longer belonged to Geraldine, so she had no claim to the lost home equity. In 2022, the Eighth Circuit heard Geraldine’s appeal. Geraldine lost on appeal. The case went all the way to the Supreme Court. Many parties across the political spectrum filed friends-of-the-court briefs. The Supreme Court found Minnesota’s take on the matter unconstitutional.

The Supremes also stepped into a similar case in Scotts Bluff County, Nebraska. This is where Kevin Fair lost a deed to foreclosure over a paltry $588. Kevin’s spouse Terry became overwhelmed with medical bills. The financial strain resulted in nonpayment of a 2014 tax bill for $588, which accrued interest and penalties. By 2015 Scotts Bluff had sold its tax lien on the home title to an oil and gas corporation, which started paying property taxes on the home. But it didn’t resolve the past-due balance, which snowballed with interest and penalties Kevin Fair couldn’t cover. In the end, Scotts Bluff transferred the deed itself to the oil and gas corporation.

In 2023, the U.S. Supreme Court directed Nebraska to reconsider its surplus retention law. Nebraska reformed its law. (Kevin Fair received a settlement from the corporation.)

The Supreme Court did not weigh in on the question of whether all states that allow for surplus retention are offending the Constitution — but they’ve said enough to press state lawmakers into making the appropriate changes.  

Fortunately, Equity Theft Was Never the Practice in Most States. What Is the Usual Practice?

Taking all of someone’s home value for minor debts has long been out of the question in most states. And most people would instinctively feel that a predatory practice is going on when a county piles on the penalties and slaps harsh deadlines on a struggling deed holder. Enabling corporations to take valuable real estate deeds away from people in nursing homes or in medical debt feels outright wrong, let alone unconstitutional.

In fact, multiple state courts have barred surplus retention on Constitutional grounds. These include the appeals courts of Michigan, New Hampshire, Vermont, Virginia, and Mississippi.

In most states, a neglected property tax debt does result in a lien on the title. But most states do not allow heavy interest to accrue on these overdue bills. The general goal is to let borrowers have a chance to resolve their debts and keep their deeds.

If the home winds up in foreclosure, the taxing agency is out to recover the balance — not someone’s entire home equity. Anything brought in by a foreclosure sale over and above the unpaid balance generally belongs to the debtor. The way it should be.

What’s Next in the Battle to Stop the Looting of Home Equity?

The Supreme Court will soon have another say in the matter of home equity theft. Just two days after Governor Newsom signed the new law in California, the Supremes announced that they’ll hear the case of Pung v. Isabella County, Michigan.

We’ll keep you posted.