The Tennessee Recordation Tax (also referred to as the “Indebtedness Tax” or “Mortgage Tax”) is codified at Tennessee Code Annotated § 67-4-409. This statute requires that “prior to public recordation of any instrument evidencing indebtedness” there shall be a state tax of 11.5¢ per $100 (the “Recordation Tax Formula”) of “the indebtedness so evidenced.” Common instruments of indebtedness subject to this tax include, but are not limited, to mortgages, deeds of trust, and conditional sales contracts.
Documents that are exempt from this tax include, but are not limited to, the recordation of “judgment liens, contractors’ liens, subcontractors’ liens, furnishers’ liens, laborers’ liens, and mortgages or deeds of trust issued under the Home Equity Conversion Mortgage Act.” § 67-4-409(b)(1).
In Tennessee, for each instrument, the first two thousand ($2,000) dollars of total indebtedness is exempt from the Recordation Tax. However, this exemption can only be taken once in relation to a particular financing statement. Once $2,000 of the maximum principal indebtedness is excluded, the remainder is multiplied as shown in the Recordation Tax Formula above. If the total amount of indebtedness on an instrument is less than $2,000, then no recording taxes are due.
Every instrument of indebtedness or amendment thereof must explicitly state the amount of the maximum principal indebtedness. The following language is required on the face of each instrument or in an attached sworn affidavit:
“Maximum Principal Indebtedness for Tennessee Recording Tax Purposes is $____________”
This number is the basis for determining the total recording tax imposed. If the amount of indebtedness later increases, the holder must pay the tax on the increase within 60 days.
We routinely represent lenders of portfolio transactions where property securing the payment of indebtedness is split between Tennessee and another state or states. In this instances, like many other states, the Recordation Tax is apportioned and paid based on the ratio of the value of Tennessee collateral over the value of the total collateral. Collateral includes “any real property or personal property securing the indebtedness evidenced by the instrument to be filed or recorded.” § 67-4-409(b)(7)(B)(i).
Nonpayment or underpayment of tax on an indebtedness, or failure timely to pay tax on an increase in indebtedness, shall not affect or impair the effectiveness, validity, priority, or enforceability of the security interest or lien created or evidenced by the instrument, it being declared the legislative intent that the effectiveness, validity, priority, and enforceability of security interest and liens are governed solely by law applicable to security interests and liens, and not by this title; however, nonpayment will result in the imposition of a tax lien, in the amount of any tax and penalties unpaid and owing in favor of the Tennessee department of revenue, and subject the holder to potential penalties.
There is authority in Tennessee indicating that the assumption of an indebtedness instrument is subject to taxation under § 67-4-409(b) if such instrument creates new indebtedness, even if no new money is advanced. New indebtedness is created when a purchaser agrees to a new contract with the mortgagee and changes the terms of the mortgage, resulting in discharge of the seller’s obligation. However, there is not new indebtedness if a purchaser simply promises to pay the debt of the seller and the seller is still held liable.
This tax is paid to county registers, the secretary of state, and any other official that can receive instruments (other than motor vehicles) for recordation.
If you need assistance with calculation of your Recordation Tax or any other component of your commercial real estate transaction, please contact the commercial real estate finance attorneys at Thompson Burton PLLC.