LEARNING OBJECTIVES
 When you've finished reading this Chapter, you should be able to:
     ► identify the various classifications of liens.
     ► describe how real estate taxes are applied through assessments, tax liens, and the use of equalization ratios.
     ► explain how nontax liens, such as mechanics' liens, mortgage liens, and judgment liens are applied and enforced.
     ► distinguish the characteristics of voluntary, involuntary, statutory, and equitable liens.
     ► define the following key terms:  ad valorem tax; inheritance taxes; special assessments; assessment; involuntary lien; specific lien
attachment; judgment; statutory lien; encumbrance; lien; subordination agreements; equalization factor; lis pendens; equitable lien; mechanic's lien; tax lien; estate taxes; mill; tax sale; general liens; mortgage lien; vendor's lien; general real estate tax; redemption; voluntary lien.

REAL ESTATE PRACTICE & PRINCIPLES KEY WORD MATCH QUIZ --- CLICK HERE ---
I would encourage you to take this “Match quiz” now as a pre-chapter challenge to see how many of these key words or phrases you are familiar with. At the end of each chapter I recommend that you take the quiz again to reinforce these important keywords. Each page contains four words or phrases and you need to drag and drop the correct definition into the puzzle key. Each page is considered as a question, but there is no scoring and you can return to each chapter quiz as many times as needed to reinforce your memory.  

 
► WHY LEARN ABOUT... REAL ESTATE TAXES AND OTHER LIENS?
There's an old saying that that there are only two things certain in life: Death and taxes. As a real estate professional, you'll have to know your share about death (for estate sales and property transfers by will or trust, for instance), but a more present issue on your client's mind will be taxes. What's more, properties may be subject to liens, which impose significant limits on both their marketability and, in some cases, their market value. Having some basic knowledge of taxes and liens will help you provide more valuable service to your clients as you guide them through some confusing property ownership issues. 

► LIENS
A lien is a charge or claim against a person's property, made to enforce the payment of money. Whenever someone borrows money, the lender generally requires some form of security. Security (also referred to as collateral) is something of value that the borrower promises to give the lender if the borrower fails to repay the debt. When the lender's security is in the form of real estate, the security is called a lien.

Liens are not limited to security for borrowed money (such as mortgage liens). Liens can be enforced against property by a government agency to recover taxes owed by the owner (tax liens). A lien can be used to compel the payment of an assessment or other special charge as well. A mechanic's lien represents an effort to recover payment for work performed. In all these ways, a person or an entity can use another's property to ensure payment for work performed, services rendered, or debts incurred.
A lien represents only an interest in ownership; it does not constitute actual ownership of the property. It is an encumbrance on the owner's title. An encumbrance is any charge or claim that attaches to real property and lessens its value or impairs its use. An encumbrance does not necessarily prevent the transfer or conveyance of the property, but because it is "attached" to the property, it transfers or conveys along with it. Liens differ from other encumbrances, however, because they are financial or monetary in nature and attach to the property because of a debt. Other encumbrances may be physical in nature (such as the easements and encroachments discussed in Chapter 7).

Generally, a lienholder must institute a legal action to force the sale of the property or acquire title. The debt is then paid out of the proceeds.

There are many different types of liens. One way liens are classified is by how they are created. A voluntary lien is created intentionally by the property owner's action, such as when someone takes out a mortgage loan. An involuntary lien, on the other hand, is not a matter of choice: It is created by law. It may be either statutory or equitable. A statutory lien is created by statute. A real estate tax lien, for example, is an involuntary, statutory lien. It is created by statute without any action by the property o equitable lien arises out of common law. It is created by a court t based on fairness. A court ordered judgment that requires a debtor to pay the balance on a delinquent charge account, for instance, would be an involuntary, equitable lien on the debtor's real estate. A vendor's lien is a lien belonging to a vendor for the unpaid purchase price of land, where the vendor has not taken any other lien or security beyond the personal obligation of the purchaser.

Liens may also be classified according to the type of property involved. General liens affect all the property, both real and personal, of a debtor. This includes judgments, estate and inheritance taxes, decedents debts, corporate franchise taxes, and Internal Revenue Service taxes. A lien on real estate differs from a lien on personal property, however. A lien attaches to real property at the moment it is filed. In contrast, the lien does not attach to personal property until the personal property is seized. Specific liens are secured by specific property and affect only that particular property. Specific liens on real estate include mechanics' liens, mortgage liens, real estate tax liens, and liens for special assessments and utilities. (Specific liens can also secure personal property, as when a lien is placed on a car to secure payment of a car loan.)

Effects of Liens on Title
The existence of a lien does not necessarily prevent a property owner from conveying title to someone else. The lien might reduce the value of the real estate, however, because few buyers will take on the risk of a property that has a lien on it. Because the lien attaches to the property, not the property owner, a new owner could lose the property if the creditors take court action to enforce payment. Once properly established, a lien runs with the land and will bind all successive owners until the lien is paid and cleared.
 
Priority of liens.    Priority of liens refers to the order in which claims against the property will be paid off (that is, satisfied). In general, the rule for priority of liens is "first come, first served." The priority of payment is from the date the liens are recorded in the public records of the county in which the property is located. A lien's priority is also in accordance with state law, which varies from state to state.

There are some notable exceptions to this rule. For instance, real estate taxes and special assessments generally take priority over all other liens, regardless of the order in which the liens are recorded. This means that outstanding real estate taxes and special assessments are paid from the proceeds of a court-ordered sale first. For example, mechanics' liens (liens for performing labor or furnishing material in improving real property) would never take priority over tax and special assessment liens. The remainder of the proceeds is used to pay other out-standing liens in the order of their priority.

FOR EXAMPLE    Mottley Mansion is ordered sold by the court to satisfy Bob's debts. The property is subject to a $50,000 judgment lien, incurred as a result of a suit to recover a mechanic's lien for installing a new addition to the mansion. $295,000 in interest and principal remain to be paid on Mottley Mansion's mortgage. This year's unpaid real estate taxes amount to $5,000. The judgment lien was entered in the public record on February 7, 2020, and the mortgage lien was recorded January 22, 2016. If Mottley Mansion is sold at the tax sale for $375,000, the proceeds of the sale will be distributed in the following order:
     1. $5,000 to the taxing bodies for this year's real estate taxes
     2. $295,000 to the mortgage lender (the entire amount of the mortgage loan out-standing as of the date of sale)
     3. $50,000 to the creditor named in the judgment lien
     4. $25,000 to Bob (the proceeds remaining after paying the first three items)
However, if Mottley Mansion sold for $325,000, the proceeds would be distributed as follows:
     1. $5,000 to the taxing bodies for this year's real estate taxes
     2. $295,000 to the mortgage lender (the entire amount of the mortgage loan out-standing as of the date of sale)
     3. $25,000 to the creditor named in the judgment lien
     4. $0 to Bob
Although the creditor is not repaid in full, this outcome is considered fair for two reasons:
     1. The creditor's interest arose later than the others, so the others' interests took priority.
     2. The creditor knew (or should have known) about the creditors ahead of it when it extended credit to Bob, so it was aware (or should have been aware) of the risk involved.

Subordination agreements are written agreements between lienholders to change the priority of mortgage, judgment, and other liens. Under a subordination agreement, the holder of a superior or prior lien agrees to permit a junior lienholder's interest to move ahead of his or her lien. Priority and recording of liens are discussed further in Chapter 14.
 
► REAL ESTATE TAX LIENS
As discussed in Chapter 7, the ownership of real estate is subject to certain government powers. One of these is the right of state and local governments to impose (levy) taxes to pay for their functions. Because the location of real estate is permanently fixed, the government can levy taxes with a high degree of certainty that the taxes will be collected. The annual taxes levied on real estate usually have priority over previously recorded liens, so they may be enforced by a court-ordered sale.

There are two types of real estate taxes: general real estate taxes (also called ad valorem taxes) and special assessments or improvement taxes. Both are levied against specific parcels of property and automatically become liens on those properties.
www.irs.ustreas.gov
The general real estate tax, or ad valorem tax, is made up of the taxes levied on real estate by various government agencies and municipalities. These taxing bodies include
     ► states;
     ► counties;
     ► cities, towns, and villages;
     ► school districts (local elementary and high schools, publicly funded junior colleges, and community colleges);
     ► drainage districts;
     ► water districts;
     ► sanitary districts; and
     ► parks, forest preserves, and recreation districts.

Ad valorem is Latin for "according to value." Ad valorem taxes are based on the value of the property being taxed. They are specific, involuntary, statutory liens. General real estate taxes are levied to fund the operation of the government agency that imposes the taxes.

Exemptions from general taxes. Most state laws exempt certain real estate from taxation. Such property must be used for tax-exempt purposes, as defined in the statutes. The most common exempt properties are owned by
     ► cities;
     ► various municipal organizations (such as schools, parks, and playgrounds);
     ► state and federal governments;
     ► religious and charitable organizations;
     ► hospitals; and
     ► educational institutions.
Many state laws also allow special exemptions to reduce real estate tax bills for certain property owners or land uses. For instance, senior citizens and veterans are frequently granted reductions in the assessed values of their homes. Some state and local governments offer real estate tax reductions to attract industries and sports franchises. Many states also offer tax reductions for agricultural land.

Assessment.
Real estate is valued for tax purposes by county or township assessors or appraisers. This official valuation process is called assessment. A property's assessed value is generally based on the sales prices of comparable properties, although practices may vary. Land values may be assessed separately from buildings or other improvements, and different valuation methods may be used for different types of property. State laws may provide for property to be reassessed periodically.

Sometimes, a property owner may feel that an error was made in determining the assessed value of his or her property—usually that the assessment is too high in comparison with the assessments of neighboring properties. Such owners may present their objections to a local board of appeal or board of review. Protests or appeals regarding tax assessments may ultimately be taken to court.

Equalization. In some jurisdictions, when it is necessary to correct inequalities in statewide tax assessments, an equalization factor is used to achieve uniformity. An equalization factor may be applied to raise or lower assessments in a particular district or county. The assessed value of each property in the area is multiplied by the equalization factor, and the tax rate is then applied to the equalized assessment.

FOR EXAMPLE  The assessments in Laslo County are 20 percent lower than the average assessments throughout the rest of the state. This underassessment can be corrected by requiring the application of an equalization factor of 125 percent to each assessment in Laslo County. Therefore, a parcel of land assessed for tax purposes at $120,000 would be taxed on an equalized value of $150,000 ($120,000 x 1.25 = $150,000).

Tax rates. The process of arriving at a real estate tax rate begins with the adoption of a budget by each taxing district. Each budget covers the financial require moments of the taxing body for the coming fiscal year. The fiscal year may be the January through December calendar year or some other 12-month period designated by statute. The budget must include an estimate of all expenditures for the year. In addition, the budget must indicate the amount of income expected from all fees, revenue sharing, and other sources. The net amount remaining to be raised from real estate taxes is then determined by the difference between these figures.

The next step is appropriation. Appropriation is the way a taxing body authorizes the expenditure of funds and provides for the sources of the funding. Appropriation generally involves the adoption of an ordinance or the passage of a law that states the specific terms of the proposed taxation.

The amount to be raised from the general real estate tax is then imposed on property owners through a tax levy. A tax levy is the formal action taken to impose the tax, usually a vote of the taxing district's governing body.
 
The tax rate for each taxing body is computed separately. To arrive at a tax rate, the total monies needed for the coming fiscal year are divided by the total assessments of all real estate located within the taxing body's jurisdiction.

FOR EXAMPLE  A taxing district's budget indicates that $800,000 must be raised from real estate tax revenues. The assessment roll (assessor's record) of all taxable real estate within the district equals $100 million. The tax rate is computed as follows:

$800,000 / $100,000,000 = .008, or .08%

The tax rate may be stated in a number of ways. In many areas, it is expressed in mills.  A mill is 1/1 ,000 of a dollar, or $.001. The tax rate may be expressed as a ' mill-per-dollar ratio, for instance, in dollars per hundred or in dollars per thousand. A tax rate of .008 or .08 percent could be expressed as 8 mills or $.80 per $100 of assessed value or $8 per $1,000 of assessed value.

Tax bills. A property owner's tax bill is computed by applying the tax rate to the assessed valuation of the property.

Generally, one tax bill that incorporates all real estate taxes levied by the various taxing districts is prepared for each property. In some areas, however, separate bills are prepared by each taxing body. Sometimes, the real estate taxing bodies may operate on different budget years so that the taxpayer receives separate bills for various taxes at different times during the year.

FOR EXAMPLE   If a property is assessed for tax purposes at $160,000, at a tax rate of 3 percent, or 30 mills, the tax will be $4,800: $160,000 x .03.

If an equalization factor is used, the computation with an equalization factor of 120 percent will be $5,760: $160,000 x 1.20 = $192,000, then $192,000 x .03 = $5,760.

The due dates for tax payments (also called the penalty dates) are usually set by statute. Taxes may be payable in 2 installments (semiannually), 4 installments (quarterly), or 12 installments (monthly). In some areas, taxes become due at the beginning of the current tax year and must be paid in advance (for example, the year 2002 taxes must be paid at the beginning of 2002). In other areas, taxes are payable during the year after the taxes are levied (2002 taxes are paid throughout 2002). And in still other areas, a partial payment is due in the year of the tax, with the balance due in the following year (2002 taxes are payable partly during 2002 and partly during 2003).

Some states offer discounts to encourage prompt payment of real estate taxes. Penalties, in the form of monthly interest charges, are added to all taxes that are not paid when due. (See Table 10.1.)

Enforcement of tax liens. Real estate taxes must be valid to be enforceable. That means they must be levied properly, must be used for a legal purpose, and must be applied equitably, that is, fairly, to all property. Real estate taxes that have remained delinquent for the statutory period can be collected through a tax sale. While the methods and details of the various states' tax sale procedures differ substantially, the results are the same.

A tax sale is usually held according to a published notice after a court has rendered a judgment for the tax and penalties and has ordered that the property be sold. Because a specific amount of delinquent tax and penalty must be collected, the purchaser at a tax sale must pay at least that amount. A certificate of sale is usually given to the successful bidder when he or she pays the delinquent tax amount.

Generally, the delinquent taxpayer can redeem the property any time before the tax sale. The taxpayer exercises this equitable right of redemption by paying the delinquent taxes plus interest and charges (any court costs or attorney's fees). In those states that permit redemption, the bidding at a tax sale is based on the interest rate the defaulted taxpayer would have to pay to redeem the property, that is, the person who bids the lowest redemption interest rate (the one most beneficial for the taxpayer) becomes the successful bidder. That interest rate theoretically would be the easiest for the taxpayer to pay to redeem the property.

Some state laws also grant a period of redemption after the tax sale. In this case, the defaulted owner (or the defaulted owner's creditors) may redeem the property by paying the amount collected at the tax sale plus interest and charges (including any taxes levied since the sale). This is known as a statutory right of redemption. (The right of redemption is discussed further in Chapter 14.) If the property is not redeemed within the statutory period, the certificate holder can apply for a tax deed. The quality of the title conveyed by a tax deed varies from state to state.

In some states, tax-delinquent land is sold or conveyed to the state or a taxing authority. At the expiration of the redemption period, the state or other taxing authority sells the property at auction and issues a tax deed to the highest bidder. The deed issued to the purchaser conveys good title because it is considered a conveyance by the state of state-owned land. In some jurisdictions, tax-delinquent land that is not sold at a tax sale due to lack of buyers is forfeited to the state. The state may then either use the land for its own purposes or sell it later.

Special assessments are taxes levied on real estate to fund public improvements to the property. Property owners in the area of the improvements are required to pay for them because their properties benefit directly from the improvements. For example, the installation of paved streets, curbs, gutters, sidewalks, storm sewers, or street lighting increases the values of the affected properties. The owners, in effect, reimburse the levying authority. However, dollar-for-dollar increases in value are rarely the result.

Special assessments are always specific and statutory, but they can be either involuntary or voluntary liens. Improvements initiated by a public agency create involuntary liens. However, when property owners petition the local government to install a public improvement for which the owners agree to pay, such as a sidewalk or paved alley, the assessment lien is voluntary.

Whether the lien is voluntary or involuntary, each property in the improvement district is charged a prorated share of the total amount of the assessment. The share is determined either on a fractional basis (four houses may equally share the cost of one streetlight) or on a cost-per-front-foot basis (wider lots incur a greater cost than narrower lots for street paving and curb and sidewalk installation).

Special assessments are generally paid in equal annual installments over a period of years. The first installment is usually due during the year following the public authority's approval of the assessment. The first bill includes one year's interest on the property owner's share of the entire assessment. Subsequent bills include one year's interest on the unpaid balance. Property owners have the right to prepay any or all installments to avoid future interest charges.

Strict subdivision regulations have almost eliminated special assessments in some parts of the country. Most items for which assessments have traditionally been levied are now required to be installed at the time of construction as a condition of a subdivision's approval.

► OTHER LIENS ON REAL PROPERTY
In addition to real estate tax and special assessment liens, a variety of other liens may be charged against real property.

A mortgage lien, or, as used in some states, a deed of trust lien, is a voluntary lien on real estate given to a lender by a borrower as security for a real estate loan. It becomes a lien on real property when the lender records the documents in the county where the property is located. Lenders generally require a preferred lien, referred to as a first mortgage lien. This means that no other liens against the property (aside from real estate taxes) would take priority over the mortgage lien. Subsequent liens are referred to as junior liens. (Mortgages and deeds of trust are discussed in detail in Chapter 14.)

A mechanic's lien is a specific, involuntary lien that gives security to persons or companies that perform labor or furnish material to improve real property. A mechanic's lien is available to contractors, subcontractors, architects, equipment lessors, surveyors, laborers, and other providers. This type of lien is filed when the owner has not fully paid for the work or when the general contractor has been compensated but has not paid the subcontractors or suppliers of materials. However, statutes in some states prohibit subcontractors from placing liens directly on certain types of property, such as owner-occupied residences.

To be entitled to a mechanic's lien, the person who did the work must have had a contract (express or implied) with the owner or the owner's authorized representative. If improvements that were not ordered by the property owner have commenced, the property owner should execute a document called a notice of nonresponsibility to relieve himself or herself from possible mechanics' liens. By posting this notice in some conspicuous place on the property and recording a verified copy of it in the public record, the owner gives notice that he or she is not responsible for the work done.

A person claiming a mechanic's lien must file a notice of lien in the public record of the county where the property is located within a certain period of time after the work has been completed. According to state law, priority of a mechanic's lien may be established as of the date the construction began or materials were first furnished; the date the work was completed; the date the individual subcontractor's work was either commenced or completed; the date the contract was signed or work was ordered; or the date a notice of the lien was recorded, filed, posted, or served. In some states, mechanics' liens may be given priority over previously recorded liens such as mortgages.

IN PRACTICE   In most states, a mechanic's lien takes priority from the time it attaches. Nonetheless, a claimant's notice of lien will not be filed in the public record until some time after that. A prospective purchaser of property that has been recently constructed, altered, or repaired should be cautious about possible unrecorded mechanics' liens against the property.

—A judgment is a decree issued by a court. When the decree establishes the amount a debtor owes and provides for money to be awarded, it is referred to as money judgment.

Judgments
A judgment is a general, involuntary, equitable lien on both real and personal property owned by the debtor. A judgment is not the same as a mortgage because no specific parcel of real estate was given as security at the time the debt was created. A lien usually covers only property located within the county in which the judgment is issued. As a result, a notice of the lien must be filed in any county to which a creditor wishes to extend the lien coverage.

To enforce a judgment, the creditor must obtain a writ of execution from the court. A writ of execution directs the sheriff to seize and sell as much of the debtor's property as is necessary to pay both the debt and the expenses of the sale. A judgment does not become a lien against the personal property of a debtor until the creditor orders the sheriff to levy on the property and the levy is actually made.

A judgment lien's priority is established by one or a combination of the following (as provided by state law):
     ► Date the judgment was entered by the court
     ► Date the judgment was filed in the recorder's office
     ► Date a writ of execution was issued

When real property is sold to satisfy a debt, the debtor should demand a legal document known as a satisfaction of judgment (or satisfaction piece), or, in those states using trust deeds, a deed of reconveyance, which must be filed with either the clerk of the court or, in some states, the recorder of deeds. Filing the satisfaction of judgment clears the record of the lien.

Lis pendens. There is often a considerable delay between the time a lawsuit is filed and the time final judgment is rendered. When any suit is filed that affects title to real estate, a special notice, known as a lis pendens (Latin for "litigation pending"), is recorded. A lis pendens is not itself a lien, but rather notice of a possible future lien. Recording a lis pendens notifies prospective purchasers and lenders that there is a potential claim against the property. It also establishes a priority for the later lien: The lien is backdated to the recording date of the lis pendens.

Attachments.  Special rules apply to realty that is not mortgaged or similarly encumbered. To prevent a debtor from conveying title to such previously unsecured real estate while a court suit is being decided, a creditor may seek a writ of attachment. By this writ, the court retains custody of the property until the suit concludes. First, the creditor must post a surety bond or deposit with the court. The bond must be sufficient to cover any possible loss or damage the debtor may suffer while the court has custody of the property. In the event the judgment is not awarded to the creditor, the debtor will be reimbursed from the bond.

Federal estate taxes and state inheritance taxes (as well as the debts of decedents) are general, statutory, involuntary liens that encumber a deceased person's real and personal property. These are normally paid or cleared in probate court proceedings. Probate and issues of inheritance are discussed in Chapter 12.

Municipalities often have the right to impose a specific, equitable, involuntary lien on the property of an owner who refuses to pay bills for municipal utility services.

A real estate owner who is charged with a crime for which he or she must face trial may post bail in the form of real estate rather than cash. The execution and recording of such a bail bond creates a specific, statutory, voluntary lien against the owner's real estate. If the accused fails to appear in court, the lien may be enforced by the sheriff or another court officer.
 
State governments generally levy a corporation franchise tax on corporations as a condition of allowing them to do business in the state. Such a tax is a general, statutory, involuntary lien on all real and personal property owned by the corporation.

IRS Tax Lien
A federal tax lien, or Internal Revenue Service (IRS) tax lien, results from a per-son's failure to pay any portion of federal taxes, such as income and withholding taxes. A federal tax lien is a general, statutory, involuntary lien on all real and personal property held by the delinquent taxpayer. Its priority, however, is based on the date of filing or recording; it does not supersede previously recorded liens.
 
► SUMMARY
Liens are claims of creditors or taxing authorities against the real and personal property of a debtor. A lien is a type of encumbrance. Liens are either general, covering all real and personal property of a debtor-owner, or specific, covering only identified property. They are also either voluntary, arising from an action of the debtor, or involuntary, created by statute (statutory) or based on the concept of fairness (equitable).

With the exception of real estate tax liens and mechanics' liens, the priority of liens is generally determined by the order in which they are placed in the public record of the county in which the property is located, and in accordance with state law.

Real estate taxes are levied annually by local taxing authorities and are generally given priority over other liens. Payments are required before stated dates, after which penalties accrue. An owner may lose title to property for nonpayment of taxes because such tax-delinquent property can be sold at a tax sale. Some states allow a time period during which a defaulted owner can redeem his or her real estate from a tax sale.

Special assessments are levied to allocate the cost of public improvements to the specific parcels of real estate that benefit from them. Assessments are usually payable annually over a five-year or ten-year period, together with interest due on the balance of the assessment.

Mortgage liens (deed of trust liens) are voluntary, specific liens given to lenders to secure payment for real estate loans.

Mechanics' liens protect general contractors, subcontractors, and material sup-pliers whose work enhances the value of real estate.

A judgment is a court decree obtained by a creditor, usually for a monetary award from a debtor. A judgment lien can be enforced by court issuance of a writ of execution and sale by the sheriff to pay the judgment amount and costs.
 
Attachment is a means of preventing a defendant from conveying property before completion of a suit in which a judgment is sought.

Lis pendens is a recorded notice of a lawsuit that is pending in court and that may result in a judgment affecting title to a parcel of real estate.

Federal estate taxes and state inheritance taxes are general liens against a deceased owner's property.

Liens for water charges or other municipal utilities and bail bond liens are specific liens, while corporation franchise tax liens are general liens against a corporation's assets.

IRS tax liens are general liens against the property of a person who is delinquent in paying IRS taxes.


RELATED STATE OF TENNESSEE LAWS, RULES, and REGULATIONS
FAQ’s about Tennessee Property Taxes

Why do real estate agents need to know about property tax computations?
Agents should acquire basic knowledge about basic property tax assessments and time frames because property taxes can influence asking prices and offered prices. It is common for taxes to change when a property is transferred to new owners.

What is Tennessee s property tax year?
Tennessee's property tax year is from January 1 through December 31. Property taxes constitute a first lien on the real estate, beginning on January 1 of each year and continuing until paid.

Is there any possibility of reductions in taxes due?
Certain properties such as churches, schools, and government-owned properties are exempt from taxation, and some charitable organizations may qualify for an exemption. The State Board of Equalization determines which properties qualify for an exemption. Certain people, such as the elderly and disabled persons, may quality for tax relief.

How are properties appraised?
Property tax is sometimes referred to as an ad valorem tax, meaning based on the value or according to the value of the property. In theory, this is a fair way to raise revenue because landowners pay proportionately to the value of their property.

The appraisers for the assessor's office use an appraisal method known as the cost approach for all improved properties, both residential and commercial, to estimate their market value. Then these estimates are adjusted by the sales comparison approach for residential properties and by the income approach for commercial properties, as applicable.

In Tennessee, the assessor's office uses the same appraising principles as appraisers. The assessor's selected properties (comparables) must meet certain criteria. First, a reasonable amount of time must be allowed for exposure to the open market. Also, the assessor may not use as comparables properties sold to related parties or sold under undue influence due to divorce, bankruptcy, adjoining land sales, zoning changes, and so forth. Both parties to the sale must have been well informed about the property and are assumed to have acted prudently and knowledgeably. Payment for the property must be made in cash or its equivalent and financing must not have any negative effect on the property's true value.

How often are properties appraised for tax purposes?
In Tennessee the real estate must be reappraised for tax assessment purposes every four to six years, depending on county option. In counties that choose a period longer than four years, the county must index value changes according to recent sales every two years. The deadline for updated assessments to be included in the current year's tax roll is September 1.

After the property is appraised, how are assessment ratios applied?
Several assessment ratios apply. Residential properties are assessed at 25 percent of appraised value, and commercial properties are assessed at 40 percent of appraised value.

Farms are assessed at 25 percent of appraised value. If the property meets the statutory requirements for a "greenbelt" classification, a lower ratio is applied. To quality for this classification, the property must contain at least 15 acres and derive at least $1,500 of income annually from some agricultural endeavor.

Can a property owner challenge a reassessment?
After a property has been reassessed, the assessor's office notifies the taxpayer as soon as practicable of any changes. Taxpayers are allowed to protest the proposed assessment. Within ten days of receipt of the reassessment, the property owner may call the County Assessor of Property's office to ask for an appointment to discuss the reassessment with an appraiser employed by the assessor's office.

If such a meeting proves unsatisfactory the property owner may, in a timely manner, file a letter of protest with the County Assessor of Property's office and request an appointment with the local Board of Equalization. If still unsatisfied, the property owner may file a request to appear before the State Board of Equalization in Nashville. After following these steps, the only recourse left is to seek satisfaction in chancery court. Each action must be done in a timely manner but before the tax bills are sent out, which is usually about the middle of September.

When are tax bills mailed out?
There is no requirement under Tennessee law that a tax statement be mailed to the property owner or mortgagee. It is done as a courtesy and is normally mailed the third week in September. Taxes may be paid beginning on October 1 and ending on February 28 (or 29 in the event of a leap year) of the following year before a penalty is assessed.

How are tax rates determined?
Tax rates are reflective of all approved state, county, city, school, and special budgets. Tax rates also consider all sources of income. After deducting the anticipated ancillary revenue derived from government reimbursements, gasoline taxes, fines, sales taxes, motel/hotel taxes, and so forth from the approved budgets, the remainder necessary to cover the costs of the approved budgets is divided by the appropriate taxable value to determine the tax rate. In Tennessee, there is no definitive tax rate because each county or incorporated municipality sets the rate. Unless exempt, all property owners pay a county tax plus a city tax, if applicable. In at least one county, for example, there are 11 different tax rates because there are 10 incorporated municipalities that collect taxes in addition to the county.

What is Tennessee s homestead exemption?
There is no homestead exemption in Tennessee for property tax purposes.

How are the due taxes paid when the property is sold?
When the property owner sells, taxes are divided into current taxes (those due but not delinquent) and prorated taxes (those due but not payable). Normally, the selling taxpayer pays the taxes that are due but not delinquent and prorates those that are due but not payable to the buyer. In some situations, such as a farm sale, taxes owed by the seller can be quite dear.

What time frames must be followed?
Property tax statements are annually mailed to taxpayers, as a courtesy, about the middle of September. Reassessments are mailed out (in the year of reassessment) as soon as the reappraisals are completed.

At what time must the taxes be paid to avoid penalties? What is the penalty?
If taxes are not paid by the deadline, a penalty is assessed, as of March l, of 1 1/2 percent per month increasing 1 1/2 percent per month until paid. After 12 months of delinquency, by which time the penalty fee is 18 percent, the Back Tax Office is given the file. The penalty increase of 1 1/2 percent per month continues, even after it is within the control of the Back Tax Office.

At what point are properties ordered sold at a tax sale?
In Tennessee the property usually is offered for sale after three years of delinquency.

Does the delinquent taxpayer have any opportunity to redeem his or her property?
After a property is sold at a tax sale, the delinquent taxpayer has up to one year to repurchase the property back from the purchaser. Property owners whose property is sold for back taxes have a one-year period of redemption. This right cannot be waived. To redeem, the delinquent owner must pay the amount at which the property was sold plus interest and attorney's fees and court costs. The person who paid the taxes (who bought at the tax sale) is entitled to a return on his or her investment.

If the delinquent taxpayer fails to repurchase the property within the statutory period, time runs out for the delinquent taxpayer to reclaim the "tax-sale property."

Title Issues
Encumbrances can affect the property's value, its title marketability, and its transferability. This chapter covers basic information about Tennessee specific rules regarding property taxes; encumbrances such as licenses, easements, and adverse possession; and zoning regulations.

FAQ’s about. Encumbrances

How does Tennessee view water rights?
Tennessee does not recognize the doctrine of prior appropriation, as do many other states, particularly in the western part of the country. Tennessee adheres to the doctrine of riparian right. Water does not generally belong either to the public or to the state, but to the landowners whose property abuts the waterway. However, they may not use or divert the water to the extent that it would deprive other riparian owners of their rights.

What are mechanics liens and when do they apply?
A mechanic's lien is a statutory lien created in favor of contractors, laborers, and materialmen who have performed work or furnished materials in the erection or repair of a building. The mechanic's lien is an equitable lien. Under TCA 66-11-145, the unpaid lien claimant must mail, by registered or certified mail, return receipt requested, a notice of nonpayment to the owner and contractor contracting with the owner within 90 days of the last day of the month within which work, services, or materials were provided. This notice must contain certain information, which is listed in TCA 66-11-145.

The lien relates to and takes effect from the time of the visible commencement of operations, excluding demolition, surveying, excavating, clearing, filling, or grading and the delivery of materials therefor. It is generally said that site preparation is not the commencement of construction; rather, delivery of building materials to the site or digging of footings is the commencement.

Who may claim a mechanics lien?
The rules for mechanics' liens are different for residential real property, which is defined as a building consisting of one, two, three, or four dwelling units where the owner intends to reside in one of the units as his or her principal place of residence. If the owner of residential real property and the contractor are different people, only the contractor may claim a lien on the real property.

When the owner of residential real property and the general contractor are one and the same person, a lien or right of lien on such real property may exist only in favor of the general contractor, subcontractor of the general contractor, and suppliers who contract with the general contractor. A laborer or supplier who contracts with a subcontractor has no lien rights.

How does the Notice of Completion Statute protect buyers?
The Notice of Completion Statute allows innocent purchasers a way to protect themselves from liens of which they have no knowledge. The buyer must record a ten-day "Notice of Completion." Any contractor must give notice or file a lien within this period or lose his or her lien rights. This ten-day notice is available only to purchasers of residential properties they intend to reside in.

What time frame must be observed for adverse possession (leading to ownership)?
If a trespasser goes into exclusive, actual, adverse, continuous, open, and notorious possession of another's real estate, the statute of limitations begins to run. If the true owner does not bring suit to eject the trespasser during the statutory period of 20 years, title to the real estate is vested in the trespasser.

There is also a seven-year statute that uses color of title as one of the necessities, but that statute is generally defensive in nature. The term defensive in nature means that the true owner may not eject the adverse possessor after seven years' adverse possession under color of title. The true owner may reenter and reclaim should the adverse possessor vacate his possession for an abnormal period.

How may easements be created in Tennessee?
Easements in Tennessee can be created by deed or by use. If by deed, Tennessee requires that a licensed attorney complete the deed.

A prescriptive easement may be created by using someone else's property openly (visibly), notoriously, under claim of right, continuous, uninterupted, and without permission for a statutory period of 20 years. Use does not have to be exclusive, meaning use by only one person is not a requirement.