Buyers of rental cabins often take the current owner’s tax bill at face value. In Sevier County that can understate the real cost by a wide margin, because a cabin’s tax depends on how it is used.
Two assessment ratios
Tennessee does not tax property on its full appraised value. Residential property is assessed at 25% of appraised value and commercial property at 40%. The tax rate is then applied to the assessed figure.
Sevier County classes a short-term rental that is not the owner’s primary residence as commercial. The change took effect with the 2023 tax bills.
What the difference looks like
The example below uses a rate of $1.50 per $100 of assessed value to keep the arithmetic simple. Actual county and city rates differ, so look up the current ones for the parcel.
| Residential, 25% | Short-term rental, 40% | |
|---|---|---|
| Appraised value | $600,000 | $600,000 |
| Assessed value | $150,000 | $240,000 |
| Annual tax at $1.50 per $100 | $2,250 | $3,600 |
| Per month | $188 | $300 |
Whatever the rate, the commercial bill is 60% higher than the residential one on the same cabin, because 40 is 60% more than 25.
Why this matters for a DSCR loan
The debt service coverage ratio divides the cabin’s monthly rent by its full monthly payment, and property tax is part of the payment. A higher tax bill lowers the ratio. If a deal is close to 1.0 on the seller’s residential tax bill, it may fall short once the cabin is taxed as a rental.
What to do before you make an offer
- Find out how the cabin is classed today. A cabin the seller lived in or used as a second home may be on the residential ratio.
- Work out the tax at the 40% ratio and use that in your numbers.
- Add the short-term rental insurance premium and any association or road fees.
- Then calculate the DSCR. We will run it with you if you send the address.
See how the ratio works on the DSCR rental loans page, or read our overview of DSCR loans for Smoky Mountain cabins.