In Tennessee, owners of multi-family dwellings pay approximately 60% more in property taxes than single-family homeowners. This stems from the belief that income-producing properties should bear a heavier tax burden. However, this perspective overlooks a vital point: these properties, while generating income, are fundamentally homes for families. The current classification system, dictated by Tennessee Code § 67-5-501, defines residential property as real property used for dwelling purposes with not more than one rental unit. Properties with two or more rental units are classified as "industrial and commercial property," raising questions about the fairness and core purpose of these dwellings.
When revenue becomes the driving goal, the classification system risks misrepresenting the nature of multi-family properties, treating them solely as commercial ventures. This can lead to higher taxes, which burden property owners and tenants alike, potentially driving up rents and reducing housing affordability. The nuances of multi-family dwellings, which serve as residences despite their income-generating aspect, are often lost in this push for increased revenue.
Adding another layer of complexity is Tennessee’s deed of trust structure. In this system, a trustee holds the legal title while the borrower retains equitable title. If the borrower defaults, the property may undergo non-judicial foreclosure—a process that closely resembles the handling of commercial properties. This arrangement can lead to the view that a mortgaged home, because of its financial ties, should be treated like commercial property. Such an interpretation blurs the lines between residential and commercial classifications, further complicating the landscape.
In the case of Castlewood, Inc. v. Anderson County, the Tennessee Supreme Court addressed the classification of multi-family properties for taxation purposes. Castlewood, Inc. developed a condominium project in Oak Ridge, consisting of 86 two-bedroom units. While six units sold to individual owners were classified as residential, the remaining 80 units, which were rented out, were classified as industrial and commercial property. The court affirmed this decision, emphasizing that properties containing two or more rental units fall under the industrial and commercial category, regardless of their residential use. This ruling illustrates how the focus on revenue generation can influence property classifications, potentially leading to higher taxes for multi-family properties.
The complexities deepen when we consider the implications of Snow v. City of Memphis, 527 S.W.2d 55 (Tenn.1975). In this case, the court upheld the constitutionality of taxing income-producing properties at a higher rate than owner-occupied residences. The ruling emphasized that properties generating income should be classified and taxed accordingly, which aligns with the goal of higher revenue generation. However, this perspective, when tied to the deed of trust structure in mortgages, suggests that any property secured by a mortgage could be seen as engaging in commercial activity.
When a borrower enters into a mortgage agreement, the property effectively serves as collateral, generating income for the lender in the form of interest payments. If the borrower defaults, the trustee sells the property in a non-judicial foreclosure, closely mirroring commercial property transactions. This parallel opens the door to interpreting all single-family homes secured by mortgages as commercial properties under current statutes focused on income generation.
The current system allows for some exceptions, such as classifying a duplex with an owner-occupied unit as residential. These exceptions indicate that nuance is possible, but they are insufficient to address the broader issues faced by larger multi-family properties. The risk remains that, in the pursuit of revenue, more residential properties could be misclassified as commercial, further undermining equity in the tax system.
Property tax rates and classifications can also vary significantly between jurisdictions, with places like Memphis seeing rates double the state average. These disparities highlight the complexity of the issue and the necessity for a consistent approach that ensures fairness while considering local contexts.
Judge-made law, with its tendency to exploit ambiguities, often leads to interpretations that shift with subsequent rulings, creating instability. Such a volatile legal environment fosters uncertainty for property owners, as classifications may change depending on the interpretation of financial ties or use. This instability prioritizes revenue generation over equitable treatment, drifting away from the legislative intent.
In cases like Castlewood, Inc. v. Anderson County, the courts have upheld the classification of multi-family properties as commercial, emphasizing that properties containing two or more rental units are rightly classified as "industrial and commercial." Similarly, in Snow v. City of Memphis, the court noted that the purpose of taxing income-producing property at a higher rate than owner-occupied residences was to reflect their revenue-generating capacity. However, these rulings often reflect a narrow interpretation focused on revenue rather than the broader context of housing affordability and equity.
The Tennessee General Assembly, as the representative body of the people, is best positioned to address these concerns. By clarifying property classifications, they can establish laws that prevent the misclassification of residential properties as commercial, ensuring a fairer tax system. Legislative clarity would help balance the need for revenue with the recognition of multi-family dwellings as homes, not just income-generating assets.
Ultimately, the aim should be to create a tax system rooted in fairness and equity, recognizing the essential role of multi-family dwellings as homes for families. Through careful review and potential new legislation, the Assembly can address current disparities, crafting a more just and stable framework for all Tennesseans. Creating a pathway for home ownership creates generational wealth for Tennesseans families and raises the quality of life for all of Tennessee.
Rob Mitchell
Murfreesboro,Tennessee
Rutherford County Assessor of Property
