Key takeaways

On June 23, 2026, the Supreme Court ruled that just compensation for tax takings is measured by the surplus proceeds from a tax sale.

The Court rejected the standard of fair market value, limiting the financial exposure of local governments.

Justice Alito authored the majority opinion, following the Court's 2023 ruling in Tyler v. Hennepin County.

The case originated from a tax foreclosure dispute in Michigan.

The Supreme Court remanded the matter back to a lower court for further proceedings.

The Decision

On June 23, 2026, the Supreme Court of the United States issued its decision in Pung v. Isabella County, holding that just compensation for tax takings is generally measured by the surplus proceeds from a tax sale rather than the fair market value of the property. The case originated from a tax foreclosure dispute in the state of Michigan. The ruling clarifies the application of the Fifth Amendment regarding surplus proceeds from tax foreclosures, establishing a definitive metric for calculating damages when a local government takes property to satisfy unpaid taxes. Following the decision, the Supreme Court remanded the compensation dispute back to a lower court.

Why It Matters

The ruling establishes a strict boundary on municipal liability in the wake of tax foreclosures. By anchoring just compensation to the surplus proceeds generated at a tax sale, rather than the potentially higher fair market value of the real estate, the Court protects local governments from paying damages that exceed the actual cash recovered during a public auction. This distinction dictates exactly how much money a former property owner can recover after the government seizes and sells their land to cover a tax debt. If compensation were tied to fair market value, local governments might owe former owners significant sums beyond what the property actually fetched at a public auction, potentially straining municipal budgets. Tying the compensation to the actual surplus proceeds aligns the constitutional remedy with the practical realities of tax sales, where properties frequently sell for less than their theoretical market worth.

Who Should Care

For lawyers

Municipal attorneys and real estate litigators must adjust their damages models in Fifth Amendment takings claims arising from tax foreclosures. Defense counsel representing counties and local taxing authorities can rely on this ruling to cap their clients' liability at the surplus amount generated from the tax sale. Plaintiffs' attorneys representing foreclosed property owners will need to focus their efforts on ensuring the tax sale itself was conducted properly to maximize those surplus proceeds, as they can no longer broadly demand fair market value as the baseline for just compensation. Litigators should anticipate disputes shifting toward the procedural fairness and commercial reasonableness of the auction process itself.

For consumers and parties

Homeowners and property investors who face tax foreclosure need to understand that if the government sells their property to satisfy a tax debt, their right to recover leftover money is strictly limited. They are generally entitled only to the extra money the property actually sold for at the auction, minus the taxes and fees owed. They cannot demand the government pay them the full market value of the home if the auction brings in a lower amount. Property owners must recognize that allowing a property to proceed to a tax sale will likely result in a significant loss of equity compared to selling the property voluntarily on the open market.

Legal Background

The Fifth Amendment to the United States Constitution requires that private property shall not be taken for public use without just compensation. In the context of property taxes, local governments possess the authority to seize and sell real estate when owners fail to pay their assessed taxes. Disputes frequently arise over what happens to the remaining equity in a property after the government sells it to satisfy that tax debt.

The decision follows the Court's previous ruling in the 2023 case Tyler v. Hennepin County. In Tyler, the Court determined that the government cannot keep the surplus equity after selling a property for unpaid taxes; retaining that surplus constitutes a taking under the Fifth Amendment. However, the Tyler decision left open a significant question regarding how to measure the exact value of that taking. Property owners argued that the taking should be measured by the fair market value of the property at the time of the foreclosure, minus the tax debt. Conversely, local governments argued that the taking is limited only to the actual surplus proceeds generated when the property is sold at a public tax auction. The Michigan dispute in Pung v. Isabella County presented the Court with the specific opportunity to resolve this measurement question.

What the Court Did

Justice Alito authored the majority opinion for the Court. The Supreme Court held that just compensation for tax takings is generally measured by the surplus proceeds from a tax sale rather than the fair market value of the property.

The Court explicitly built upon the foundation established in Tyler v. Hennepin County. While affirming that the government cannot keep the surplus, the majority concluded that the government's financial liability is tethered to the actual funds generated by the sale. By rejecting the fair market value standard, the Court acknowledged the mechanics of municipal tax foreclosures. Properties sold at public tax auctions do not reliably yield the same price as a traditional, open-market real estate transaction. The Court concluded that the Fifth Amendment requires the return of the surplus proceeds actually realized, rather than a theoretical market valuation that the government never collected. Following this determination, the Supreme Court remanded the compensation dispute back to a lower court to apply this specific standard to the facts of the Michigan tax foreclosure.

How It May Be Applied

Lower courts will now apply the surplus proceeds standard to pending and future tax foreclosure disputes across the country. Local governments conducting tax sales will likely face reduced litigation risk regarding the valuation of foreclosed properties, provided they maintain accurate accounting and return the actual surplus proceeds to the former owners.

However, the ruling may generate new litigation concerning the methods used to conduct tax sales. If a former owner's compensation is strictly limited to the surplus generated at auction, plaintiffs may begin challenging the advertising, bidding procedures, and overall commercial reasonableness of those auctions. Plaintiffs will likely argue that the government failed to conduct a sale designed to generate a legitimate surplus, thereby artificially depressing the compensation owed. Courts will need to determine the baseline procedural requirements for a valid tax sale to ensure the resulting surplus proceeds represent a constitutionally adequate measure of compensation under the Fifth Amendment.

Comparison of Compensation Metrics

Metric	Description	Impact on Local Governments	Impact on Property Owners
Surplus Proceeds (Adopted Standard)	The actual money left over after a tax sale pays off the tax debt and associated fees.	Limits financial liability to the funds actually collected at auction.	Restricts recovery to the auction price, which is often lower than market value.
Fair Market Value (Rejected Standard)	The theoretical price a willing buyer would pay a willing seller on the open market.	Would expose governments to damages exceeding the cash generated from the tax sale.	Would maximize recovery, compensating owners for their full theoretical equity.

Plain-English Callout

When a homeowner falls behind on property taxes, the local government can seize the property and sell it at an auction to pay off the debt. If the property sells for more than what the homeowner owed, the government cannot simply keep the extra money. The Supreme Court has now clarified exactly how much of that extra money the homeowner gets back. The homeowner is entitled to the actual leftover cash from the auction, known as the surplus proceeds. They are not entitled to the theoretical "fair market value" of the home, which is often much higher than what a property actually sells for at a forced tax auction.

This article is general legal information and commentary about legal developments. It is not legal advice, does not address your specific situation, and is not a substitute for advice from a licensed attorney. Reading this article and contacting us through this website do not create an attorney-client relationship.

Sources & authorities

Pung v. Isabella County — source
Pung v. Isabella County — source
Pung v. Isabella County — source

Supreme Court Limits Tax Foreclosure Compensation to Surplus Proceeds

Key takeaways