Illinois Creates New Surplus Equity Fund for Property Owners Who Lost Property Through a Tax Deed

Sep 1

8 min read

After the U.S. Supreme Court ruling in Tyler v. Hennepin County, all states other than Illinois amended their laws to come into compliance with the constitutional requirements outlined In Tyler. That changed on July 10, 2026, when Gov. Pritzker signed HB4537 into law (click here for a link to the house bill).

HB4537 was spearheaded by Maria Pappas’ office and the Cook County Board and made significant changes to the Illinois Property Tax Code. However, HB4537 has two significant omissions: 1) it failed to provide ANY funding for the Indemnity Fund, which in Cook County is taking 7-8 years for judgments to be paid, and that timeline keeps growing; and 2) it created a “Surplus Equity Fund” that will have limited funding for a few years and will then have even LESS funding in Cook County when private tax investors are removed from the delinquent tax collection process and it is turned over to the commonly plagued Cook County Land Bank Authority (read more about it here and here.

HB4537 did create the new Surplus Equity Fund and a legal process for former property owners to seek compensation for equity lost when a tax deed was issued. The new law represents a significant change in the Illinois Property Tax Code and comes after two major court decisions: the United States Supreme Court's decision in Tyler v. Hennepin County and the federal court's subsequent ruling in Kidd v. Pappas (click here to review the opinion). For Illinois property owners who lost valuable real estate over property tax debt less than the value of the property, the new law provides an avenue to recover their equity.

What Is Surplus Equity?

To understand the new Illinois law, it helps to first understand equity. Equity is generally the portion of a property's value that belongs to the owner after accounting for mortgages, liens, and other amounts owed against the property. For example, if a home is worth $300,000, has a $75,000 mortgage, and a tax purchaser has paid approximately $25,000 in real estate taxes, the owner has $200,000 in equity.

Previously, an Illinois property owner who failed to redeem delinquent property taxes could ultimately lose title through the tax deed process - even when the property's value exceeded the amount owed - and recevie none of their equity. The new Illinois Surplus Equity Fund is designed to provide former owners with a means to seek compensation for their lost equity.

The Supreme Court's Decision in Tyler v. Hennepin County

In 2023, the United States Supreme Court decided Tyler v. Hennepin County. Geraldine Tyler owned a condominium in Minnesota and owed approximately $15,000 in unpaid property taxes, interest, and penalties. After she failed to pay the debt, Hennepin County obtained title to the condominium and eventually sold it for $40,000. The county kept the entire $40,000 - including approximately $25,000 beyond what Tyler owed. Tyler sued the county.

The United States Supreme Court unanimously held that Tyler had stated a claim under the Takings Clause of the Fifth Amendment. The Court recognized that government may collect taxes that are legitimately owed and obtain title to property, but its right to collect a debt does not give it the right to keep all of the equity.

Kidd v. Pappas: Applying Tyler to the Illinois Tax Sale System

Illinois does not use exactly the same system the Supreme Court considered in Tyler. Illinois counties generally sell delinquent property taxes to private tax purchasers. The purchaser receives a tax certificate and, if the taxes are not redeemed and the statutory requirements are satisfied, may ultimately petition the court for a tax deed. Once the tax deed is issued, the former owner's interest in the property is extinguished.

That raised an important question after Tyler: Can an Illinois property owner lose all of their equity simply because the property ultimately goes to a private tax purchaser rather than directly to the government? That issue was addressed in Kidd v. Pappas. The case involved Cook County property owners who alleged that the Illinois tax sale laws deprived them of their equity without just compensation when they lost title to a tax purchaser.

In December 2025, the United States District Court for the Northern District of Illinois ruled that Cook County tax sale procedures violated the Fifth Amendment's prohibition against takings without just compensation. The court rejected the contention that the involvement of a private tax purchaser eliminated the constitutional problem.

The court also examined Illinois' existing Indemnity Fund. It concluded that the Indemnity Fund did not prevent the constitutional violation because recovery was not guaranteed and depended on requirements beyond merely proving the amount of lost equity. The court noted, among other things, statutory limitations and the Fund's underfunding and backlog. Kidd therefore brought the constitutional principles recognized in Tyler directly into the Illinois tax sale system and underscored the need for a mechanism that provides former owners an opportunity to recover their equity.

How Is an Illinois Surplus Equity Award Calculated?

The calculation depends on the facts of each case. Under 35 ILCS 200/21-302, the equity award is limited to the value of the property as of the date the tax deed was issued, less mortgages and liens, plus other possible deductions.

For example:

Fair cash value of property	$300,000
Mortgage	($75,000)
Taxes paid by tax purchaser	($25,000)
Potential surplus equity	$200,000

The actual calculation can be more complicated. Determining a potential award requires examining the property's value at the appropriate time, mortgages, liens, taxes paid, the underlying tax certificate, and the underlying tax deed proceedings. If you are wondering what your equity may be, please contact our office.

Who May Be Eligible for an Illinois Surplus Equity Claim?

One of the most important aspects of the new law is that it is not limited to people who lose property after July 10, 2026. For tax deeds recorded during the two years before July 10, 2026, the statute permits a claim for a surplus equity award to be filed no later than two years after the law's effective date, which means tax deeds recorded on or after July 10, 2024. This makes the law potentially important for people who have already lost their property and assumed all they could potentially do was file a claim under the Indemnity Fund..

The statute also addresses outstanding tax certificates issued before July 10, 2026 that later result in recorded tax deeds. For those claims, the statute provides that a claim for an equity award must be filed no later than two years from the date the tax deed is recorded. Because eligibility and filing deadlines depend on the particular tax sale and tax deed history, former property owners should not assume they are either eligible or ineligible without discussing with our office.

Where Is an Illinois Surplus Equity Claim Filed?

A surplus equity claim is a court proceeding, not simply an administrative application submitted to the county. The statute requires the previous owner to petition the court that entered the order directing the tax deed to issue. The County Treasurer, as Trustee of the Surplus Equity Fund, is named as the defendant. The court determines whether the former owner is entitled to an award and, if so, the amount of surplus equity to be awarded.

How Is the Surplus Equity Fund Funded?

The new law establishes surplus equity fees associated with Illinois tax sales and certain subsequent tax payments. Those funds are paid to the County Treasurer as Trustee of the Surplus Equity Fund. The statute also addresses what happens if the Fund does not have enough money to satisfy a surplus equity judgment. If the Surplus Equity Fund has insufficient funds, the county must fund the balance necessary to satisfy the unpaid award within 12 months after the court's order. If the Surplus Equity Fund quickly amasses a substantial balance, the county itself will be paying these judgments. Moreover, HB4537 also phases out private tax buyers in favor of county land banks, which will further limit the amount of money going into the Surplus Equity Fund and expose county’s general funds to more judgments.

What About the Existing Illinois Indemnity Fund?

Illinois has long maintained an Indemnity Fund that can provide compensation to certain property owners who lose property through the tax deed process. The new Surplus Equity Fund does not simply eliminate the Indemnity Fund. Instead, the new law changes the relationship between the available remedies. The appropriate claim may depend on the date of the tax certificate, the date of the tax deed, the circumstances surrounding the loss, and whether compensation has already been received. The new statute also prevents double recoveries. A previous owner who successfully recovered indemnity on the same property under Section 21-305 cannot also obtain a Surplus Equity Fund award on that property, and similar recoveries against the county may be offset.

I Already Lost My Property. Is It Too Late?

Not necessarily. Because the statute expressly addresses tax deeds recorded during the two years before July 10, 2026, some former Illinois property owners who have already lost their property may still have the ability to pursue their lost surplus equity. The statute contains specific filing deadlines, however. Waiting to investigate a potential claim could result in the loss of the right to pursue it. Therefore, please contact our office immediately if you have lost, or are losing, your property to a tax deed.

What Should I Do If I Lost Property Through a Tax Deed?

If you previously owned property in Illinois and lost it because a tax purchaser obtained a tax deed, it may be worthwhile to have the case reviewed. You should consider a potential claim if:

The property was worth more than the unpaid taxes;
The tax deed was recorded on or after July 10, 2024;
The property had little or no mortgage debt;
You had equity in the property.

The difference can be substantial. A person can lose property worth hundreds of thousands of dollars because of a tax debt representing only a fraction of the property's value. Following Tyler, Kidd, and the enactment of Illinois's new Surplus Equity Fund law, former owners now have a statutory procedure to seek recovery of their lost equity.

Can I get my property back?

A Surplus Equity Fund claim is generally a claim for monetary compensation for lost equity, not a proceeding to return ownership of the property to the former owner. However, you may be able to negotiate an agreement with the tax buyer wherein you can maintain possession of your property and repurchase the property with the money you recover from the Surplus Equity Fund.

What if I already filed an Illinois Indemnity Fund case?

That requires a case-specific analysis. The new statute contains provisions governing the interaction between Indemnity Fund recoveries and Surplus Equity Fund awards and prevents certain double recoveries.

Hiring an Attorney

Stanko McCarthy Law Group represents property owners throughout Illinois in tax deed, surplus equity, and Indemnity Fund matters. If you or a family member lost real estate through an Illinois tax deed, we can review the underlying tax deed case, relevant filing dates, the property's value, mortgages and liens, taxes paid, and other circumstances to determine whether a claim under the new Illinois Surplus Equity Fund may be available. If your property was worth more than the taxes owed when the tax deed was issued, you may have a claim for the equity you lost. Contact us to discuss whether you may qualify for an Illinois surplus equity award.

This article is provided for general informational purposes only and does not constitute legal advice. The law governing Illinois tax sales and surplus equity claims is complex, and eligibility depends upon the facts and circumstances of each case.

Authorities

Public Act 104-0553, effective July 10, 2026.
35 ILCS 200/21-296, 21-301, and 21-302.
Tyler v. Hennepin County, 598 U.S. 631 (2023).
Kidd v. Pappas (captioned Bell et al. v. Pappas et al.), No. 22 C 7061, Memorandum Opinion and Order (N.D. Ill. Dec. 8, 2025).