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Supreme Court Rejects The Constitutional Challenge Of Varying Rates For Rental Properties

In October of 2010, the Supreme Court of Ohio upheld as constitutional rules adopted by the state tax commissioner that granted a 10 percent property tax rollback to owners of single-family, two-family and three-family rental properties, but did not extend the same or similar tax break to owners of apartment buildings with four or more residential units.

As part of a 2005 overhaul of Ohio’s business tax structure, the legislature had amended a statute that previously granted a 10 percent property tax exemption or “rollback” for all real property in the state occupied by residential dwellings regardless of the number of units on that property. The amended statute limited the partial tax exemption to properties occupied by single-family, two-family or three-family residential dwellings. It also classified properties occupied by four or more residential rental units as “intended primarily for use in a business activity.” The properties therefore were not eligible for the 10 percent rollback.

As a result, the Ohio Apartment Association (OAA), which represents owners and operators of multi-unit apartment buildings across the state, filed a complaint with the State Board of Tax Appeals (BTA). The BTA ruled that the challenged rules were reasonable and therefore enforceable. The OAA then appealed the BTA’s ruling to the Supreme Court.

In its decision, the Court opined that the rules were constitutional because “A statutory classification that involves neither a suspect class nor a fundamental right, as here, does not violate the Equal Protection Clauses if it bears a rational relationship to a legitimate governmental interest. … Moreover, it is well settled that assessment of taxes is fundamentally a legislative responsibility, and ‘[t]his already deferential standard “is especially deferential” in the context of classifications arising out of complex taxation law.’ … States have broad leeway in making classifications and drawing lines that in their judgment produce reasonable systems of taxation.”

“Appellants … contend that the administrative rules violate the Equal Protection Clause because rental properties containing three units receive the ten percent rollback but four-unit rental properties do not. According to appellants, this distinction by number of units is illusory, and there is no evidence of

any other reasonable basis for distinguishing between rental properties. … (T)hat claim overlooks the following evidence. Testimony before the BTA indicated that the line was drawn between three- and four-unit properties because properties with three or fewer units were more characteristic of residential property, and properties with four or more units more closely resembled commercial property. Other testimony reflected that from 1993 to 2007, single-family homes, duplexes, and triplexes appreciated in value at very similar rates. In contrast, the rate of appreciation for rental properties of four or more units was 25 to 30 percent less over the same period. And property that is classified as residential continues to appreciate at a higher rate than commercial property, thereby justifying the different tax treatment.”

“Appellants further contend that three-unit owners and four-unit owners (1) have the same responsibilities (e.g., maintenance and ‘peaceful enjoyment’), (2) are treated the same for tax purposes, and (3) may own rental properties of both sizes. But this evidence does not rebut the tax commissioner’s evidence that properties with four or more units (1) are generally more commercial in nature and (2) appreciate at a lower rate than single-family homes, duplexes, and triplexes.”

The Court went on to find that its “job is simply to determine, with great deference, whether there is a rational basis for the General Assembly’s taxation decisions.” The Court therefore concluded that providing tax relief to property owners whose property values are increasing at a higher rate than appellants’ properties constitutes a rational basis for the different classifications.

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