If you own real property in which you have substantial equity, never let the government sell it for unpaid taxes.

The property can go for a fraction of what it is worth, and you may have little recourse.

That is the lesson of the U.S. Supreme Court’s decision in Pung v Isabella County.

Background

Scott Pung bought a three-bedroom ranch house on a little over half an acre in Union Township, Michigan, in 1991.

Michigan taxes a principal residence at a lower rate than a second home, and the Pung family claimed the principal residence exemption and paid its tax bills. Scott Pung died in 2004, and the home remained in his estate while family members continued to live there.

In 2010, the Union Township tax assessor decided the exemption did not apply and denied it for 2007 through 2011. The Pungs took the dispute to the Michigan Tax Tribunal and won.

The assessor imposed the tax again. The Pungs litigated a second time, this time in the state courts, and won again.

The disputed amount, including penalties and interest, came to $2,241.93. Isabella County began foreclosure proceedings anyway.

A state trial court blocked the foreclosure, but the Michigan Court of Appeals allowed it to proceed. The county followed the procedures in the Michigan General Property Tax Act when it:

• • gave the family a redemption period,

  • provided public notice of the sale,

  • obtained a judgment of foreclosure from a state court, and

  • sold to the highest bidder.

In June 2018, the Pungs permanently lost title to the home, which the family had owned for 27 years.

At the public auction, the home sold for $76,008. That was about 39 percent of the $194,400 at which the county had valued it for property tax purposes. The county initially kept every dollar.

Nearly 18 months later, the auction purchaser resold the property on the open market for $195,000.

One striking feature of the Supreme Court’s decision is that the justices did not agree on whether the Pungs owed the county anything at all.

• • Justice Alito’s opinion for the court said that after both wins the family “still owed $2,241.93” and “refused to pay.”

  • Justice Thomas, writing separately, said the Pungs paid every bill in full and never owed the extra amount, and that the county’s lawyer could not explain the basis for the tax even at oral argument.

The court did not resolve the conflict, because the validity of the debt was not the question before it.

Michael Pung, as personal representative of the estate that owned the home, sued the county in federal district court. The district court held that the estate was entitled to the surplus proceeds—$73,766, the sale price minus the tax debt—but not to the home’s fair market value. The Sixth Circuit affirmed.

Measured against the county’s own $194,400 valuation, the family was out roughly $118,000 over a $2,242 dispute.

The estate took the case to the Supreme Court, arguing that the sale violated the takings clause of the Fifth Amendment, which bars the government from taking private property for public use without paying the owner “just compensation.”

The estate lost on that argument and on a second one under the Eighth Amendment. But as you will see, the case is not over.

Surplus Proceeds Belong to the Property Owner

Until a few years ago, a number of states let local governments keep everything a tax foreclosure sale produced, even when the sale brought in far more than the tax debt.

A Minnesota county foreclosed on a condominium owned by a 94-year-old woman over roughly $15,000 in taxes, interest, and penalties (the unpaid tax itself was about $2,300); sold the unit at auction for $40,000; and kept the entire amount, including the $25,000 surplus.

The homeowner took her case to the Supreme Court, which held in 2023 that a local government may not retain the surplus, because doing so is an unconstitutional taking of property without just compensation.

Tyler v. Hennepin County was a major victory for property owners, and several states rewrote their foreclosure statutes in response to that decision to stop what critics call “equity theft.”

But Tyler answered only half the question: It established that a surplus must be returned. It did not say how to measure that surplus when the property sells at auction for far less than it is worth. Pung answers that question.

The Sale Price Is the Baseline for Just Compensation

Nobody disputed that the Pung estate was entitled to the $73,766 surplus. The estate wanted more.

Tax auctions routinely produce prices well below market value, as this one did. The estate argued that when a local government forecloses and sells, the owner must receive the property’s fair market value minus the tax debt—here, $192,158 rather than $73,766—and that anything less was both a taking without just compensation and an excessive fine.

The Supreme Court rejected the argument. Writing for a unanimous court, Justice Alito held that “the proper baseline under the takings clause is the price obtained in a tax sale, at least when the sale is fairly conducted in light of our country’s history of tax sales.”

Note the phrase “at least when.” The court did not hold that the auction price governs only when the sale is fair. It reserved the question of what happens when it is not.

Three lines of reasoning drove the result:

1. History. For centuries, English and American law permitted the seizure and sale of property for unpaid taxes on one condition: the government had to return the “overplus” and nothing more.

Federal statutes enacted in 1812 and 1815 required a refund of the surplus, and state laws of that era said the same thing.

2. Precedent. Eminent domain cases, in which fair market value is the default measure, do not control here. Even in that setting, the court has “refused to designate market value as the sole measure of just compensation.”

The estate leaned on a concurring opinion from a Michigan Supreme Court justice, but the court pointed out that the majority in that same case had expressly rejected fair market value as the measure.

3. Practical consequences. A fair market value rule would make tax sales unworkable. The court offered a hypothetical: Consider a property worth $100,000, a $20,000 tax debt, and a $60,000 auction price. Under the traditional rule, the government keeps $20,000 and refunds $40,000.

Under the estate’s desired rule, the government would owe the former owner $80,000, turning its own collection action into a $20,000 loss paid to the delinquent taxpayer. Local governments would have to absorb those losses or take on the cost and risk of marketing foreclosed homes themselves.

The Excessive Fines Argument Failed Too

The estate also argued that taking a $194,400 home to collect a $2,242 debt was an excessive fine barred by the Eighth Amendment. A forfeiture can be a fine for Eighth Amendment purposes if it serves “in part to punish.”

But the court found no precedent and no historical evidence that a fairly conducted tax sale violates the excessive fines clause, and it observed that a fair market value rule under the Eighth Amendment would produce the same unworkable consequences as under the Fifth.

The court expressly declined to decide two broader questions: whether the Fifth and Eighth Amendments can both apply to the same government action, and whether the excessive fines clause reaches only fines connected with crimes.

What the Court Left Open

The estate did not walk away with nothing.

The Supreme Court vacated the Sixth Circuit’s judgment and sent the case back for further proceedings. The fight then shifted from how much the property was worth to how the county went about selling it.

In its merits briefing and at oral argument, the estate argued that the county’s procedure was unfair in several respects: it seized more property than the debt required, and it should have pursued personal property or placed a lien rather than selling the house. Those arguments fell outside the question on which the court granted review, so the court did not reach them.

On remand, the Sixth Circuit will decide whether the arguments were properly preserved and, if they were, may consider them.

Both sides agreed that a jurisdiction might violate the Constitution by employing “blatantly unfair procedures, such as by conducting a sham sale or needlessly delaying a tax sale while real estate prices crashed.” But they disagreed on the standard: The county argued that following state law is enough. The United States, as amicus, argued that a sale must be “fairly conducted . . . in light of the Nation’s history and tradition of tax sales.” The Supreme Court adopted neither formulation.

Justice Sotomayor, joined by Justices Gorsuch and Jackson, wrote separately to underscore the point. She read the court’s opinion as neither identifying the contours of a fair auction nor endorsing any party’s version of the standard, and as correctly leaving those issues for remand.

Justice Thomas went further. He joined the court’s opinion except as to one part and concurred in the judgment, but wrote at length that what the county did “was wrong, and, on my initial view, likely unconstitutional.” 

His opinion maps the historical limits on tax sales: the government had to exhaust the taxpayer’s personal property before reaching real property, it could sell only so much property as the debt required, and notice requirements were strict. Quoting a 19th-century treatise, Justice Thomas noted that a sale of the whole when less would pay the tax “is void.”

For property owners, that reframes the fight. Future cases are unlikely to argue that an auction price was too low. They will argue that the government gave inadequate notice, failed to follow required procedures, denied a meaningful opportunity to redeem, ran a sale not reasonably designed to attract bidders, or took more property than the debt required.

How IRS Tax Sales Compare

On the central question of measurement, Pung and Tyler bring local tax foreclosures into line with federal law.

The IRS has long been required to refund the surplus proceeds of a federal tax sale to the person legally entitled to them, on application and satisfactory proof. That surplus is figured on what the sale actually produced after authorized deductions, not on hypothetical fair market value.

Federal practice adds two protections that the Constitution does not require of local governments: a minimum bid and a right of redemption.

Minimum Bid

This first protection is narrower than it looks.

Before selling seized property, the IRS must set a minimum bid—a reserve price. If no one bids that much, the property does not go to a lowball bidder. It is either declared purchased by the United States at that price or released back to the owner.

The IRS sets that minimum bid at the lower of two numbers:

• What the property is worth, discounted. Start with fair market value, cut up to 25 percent to reach forced sale value, cut up to another 20 percent, then subtract liens senior to the federal tax lien. Before senior liens, that lands at roughly 60 percent of fair market value.

• What the government is owed. This encompasses the tax, penalties, interest, lien filing fees, and expenses of levy and sale.

Determining which number is smaller decides whether the minimum bid protects your equity. Owe $150,000 on a $194,400 house, and the first number controls: the floor sits near $116,640, and the house cannot be sold for a fraction of its value.

Owe $2,242 on that same house, and the second number controls: the floor is a few thousand dollars, which is no floor at all.

The protection runs opposite to intuition. The smaller your tax debt relative to your property, the less the minimum bid. On the Pungs’ facts, it would have done nothing.

Right of Redemption

This is the more meaningful difference.

After the IRS sells real property, the owner has 180 days to redeem it by paying the purchaser the sale price plus interest, and the purchaser’s title is not final until that window closes.

No comparable federal right applies to a local property tax foreclosure sale, and the Supreme Court has not created one.

Property Owners Should Act Before a Tax Sale

The court’s reasoning rests on a premise worth taking seriously: an owner who receives proper notice and knows the property is worth more than the tax debt can usually avoid the sale. The court pointed to two ways:

• Refinance the property or use it as collateral for a new loan to pay off the taxes.

• Sell the property (or other property) before foreclosure, pay off the tax debt, and keep what is left to buy or rent a new home.

The Pungs, the court observed, had years to take those steps. The family responded that it did not receive the foreclosure notices until after the redemption deadline had passed—precisely the kind of claim that survives Pung and is now headed back to the Sixth Circuit.

The safest course is to act well before the redemption deadline.

Tax auctions typically produce prices far below market value, so the owner almost always does better selling or borrowing than letting the sale happen.

Key point. Read every tax notice.

If a bill looks wrong, contest it, but understand that a favorable ruling on the assessment does not automatically stop a foreclosure already in motion. Contact the taxing authority, a lawyer, or a housing counselor promptly to discuss payment, deferral, redemption, refinancing, or sale.

Takeaways

Here are five takeaways from this article.

• Property owners have a constitutional right to the surplus proceeds from a tax foreclosure sale after taxes and costs are paid, but they may have to follow state claim procedures and deadlines to collect it.

• Property owners are not constitutionally entitled to the property’s fair market value when a fairly conducted tax sale produces a lower price. The excessive fines clause of the Eighth Amendment does not change that answer.

• After a fairly conducted tax sale, the actual sale price—not hypothetical fair market value—is the baseline for measuring just compensation.

• The Supreme Court did not define what makes a tax sale fair. Challenges based on inadequate notice, defective procedures, no meaningful opportunity to redeem, or seizing more property than the debt required remain open, and Justice Thomas’s separate opinion is a road map for bringing those challenges.

• Federal tax sales measure the surplus the same way, but federal law adds a minimum bid and a 180-day right of redemption that the onstitution does not require of local governments.