California Finally Ends ‘Home Equity Theft’—Closing the Last Loophole in Property Tax Foreclosures

In 2023, the Supreme Court issued a landmark ruling that reaffirmed a basic constitutional principle: When the government seizes property, it cannot keep more than what it is owed.

And yet, until this month, it was still happening to California homeowners who fell behind on their property taxes.

When a homeowner becomes delinquent on their property taxes, local governments place a lien on the property for the amount owed. Before the Supreme Court’s 2023 Tyler v. Hennepin County ruling, that power often went much further. Some governments seized tax-delinquent properties, sold them at auction, and kept all the proceeds—even after the tax debt was paid.

That meant a homeowner who owed only a few thousand dollars in back taxes could lose a property worth hundreds of thousands and receive nothing in return.

After the 2023 ruling, though, most states passed reforms that ensured homeowners received any excess proceeds. But in California, a loophole in the state’s tax code allowed counties to bypass public auctions and instead transfer tax-delinquent properties directly to other government agencies or nonprofit organizations.

While the policy may have been intended to serve the public good, it had devastating consequences. Without an auction, no sale took place and no proceeds were generated, depriving homeowners of all their remaining equity.

California’s fix: What AB 418 does

Earlier this month, Gov. Gavin Newsom signed Assembly Bill 418 into law, closing what the Pacific Legal Foundation called “the last major loophole” in the Golden State’s property tax foreclosure system. 

The new law bans local governments from keeping or transferring homes without providing compensation to the former owner, and ensures that any foreclosure generates a sale, and any surplus funds from a sale are returned to the homeowner.

While Newsom didn’t issue a public signing statement, property rights advocates hailed the reform as a historic victory. 

“For too long, California allowed local governments to strip homeowners of their life savings,” said Jim Manley, state policy director at the Pacific Legal Foundation. “With the signing of AB 418, that injustice ends.”

As many as 3.3% of California mortgage holders were delinquent on their property taxes in 2024, according to a recent Cotality report. That may sound like a small share, but in a state with nearly 40 million residents and a 55% homeownership rate, it represents hundreds of thousands of homeowners at risk of falling into tax foreclosure.

The reform caps off a decade-long campaign by PLF to end home equity theft nationwide. For California homeowners, it’s long-overdue protection from the government collecting more than what it’s owed. And for the remaining states practicing shadow equity theft, it’s a promising example of how to right these wrongs.

This is a "victory not just for California property owners, but for property rights everywhere,” Manley added. “With the signing of AB 418, that injustice ends.”

What it means for homeowners

For California homeowners, AB 418 doesn’t erase the risk of losing property over unpaid taxes—but it ensures they won’t lose everything. Counties can still foreclose if taxes go unpaid, but properties can no longer be transferred without a sale, and any equity remaining after the debt is settled must be returned to the original owner.

For California homeowners, AB 418 restores a basic promise first laid out in the Constitution’s Takings Clause: The government can collect what it’s owed.

Or, in the words of Chief Justice John Roberts: “A taxpayer must render unto Caesar what is Caesar’s, but no more.”