New Jersey Court Adopts 'Predominant Use' Test for Mixed-Use Property Tax Classification

TRENTON, N.J. – The New Jersey Tax Court established a significant new standard for the state’s real estate sector on April 27, 2026, ruling that mixed-use properties should be classified based on their “predominant use.” The decision, which immediately reclassified two properties in Edgewater from commercial to residential, creates a new precedent that could allow many property owners to reduce their tax liabilities, particularly concerning the state's realty transfer fee. The ruling came in the case of One Main St Edgewater, LLC v. Edgewater Borough, where the court granted summary judgment to the property owner. The case involved two six-story buildings, each with commercial and retail operations on the ground floor and residential apartments on the five floors above. The court ordered the borough to change the properties’ classification for the 2026 tax year from Class 4A “Commercial Property” to Class 4C “Apartments.” The most immediate financial consequence of the reclassification relates to an impending sale of the two properties. Under New Jersey law, the sale of commercial property is subject to an additional realty transfer fee, often called the “mansion tax,” for transactions exceeding $1 million. However, apartment buildings classified as 4C are exempt from this fee. By securing the reclassification before the sale, the owner is positioned to avoid a substantial tax payment. This decision addresses a long-standing ambiguity in New Jersey’s property tax regulations. In its opinion, the court, presided over by Judge Joseph M. Raffetto, noted that the state’s current administrative code, specifically N.J.A.C. 18:12-2.2, provides definitions for distinct categories like commercial, industrial, and residential properties but does not explicitly contemplate mixed-use buildings. This regulatory gap has led to uncertainty and disputes between municipalities and property owners over how to classify buildings that combine different functions. The court asserted its jurisdiction to resolve property classification appeals even when the total assessed value, or quantum, of the property is not in dispute. In the absence of clear guidance from the state, the court determined that a predominant use test is the most appropriate standard. This test requires tax assessors to evaluate a property based on its primary function. In the Edgewater case, the court found that the residential component of the buildings was clearly the dominant use, warranting the Class 4C designation. The ruling is particularly relevant given the proliferation of mixed-use development across New Jersey and the United States. This development model, which integrates residential units with retail, office, and community spaces, has become a popular strategy for urban revitalization and creating walkable communities. Developers and investors in such projects have often faced inconsistent tax treatment from one municipality to another. This ruling provides a legal framework that could bring more predictability to the tax landscape for these assets. Under the New Jersey Administrative Code, Class 4A Commercial Property is a broad category for income-producing properties not otherwise specified, such as office buildings, shopping centers, and restaurants. In contrast, Class 4C is reserved for apartment buildings, defined as dwellings functionally designed for use by more than four families. The shift from 4A to 4C is not merely administrative; it carries direct and significant financial implications beyond the realty transfer fee, potentially affecting local property tax assessments and the appeal process. The court's opinion effectively places the onus on the state government to provide a more detailed framework. The ruling specifies that the predominant use test will stand as the standard unless the New Jersey Legislature enacts new statutory revisions or the Director of the Division of Taxation adopts more comprehensive regulations for mixed-use properties. For property owners and developers in New Jersey, this ruling introduces both a significant opportunity and a new layer of complexity. While the “predominant use” test appears straightforward, its application will likely be contested at the municipal level, as local assessors may interpret the standard differently. Proving that a property's use is predominantly residential will require careful documentation of square footage allocations, revenue streams from different components, and the overall functional design of the building. This is not a simple declaration but a factual argument that must be supported with clear evidence. In our experience, municipalities are often reluctant to change classifications that result in lower tax revenue, meaning property owners must be prepared to build a robust case. Navigating these nuanced classification challenges is a core part of our tax preparation and compliance services. We believe this ruling is a positive development for many of our clients who have invested in modern, mixed-use assets, but capitalizing on it requires proactive engagement with tax authorities. It is crucial for owners of mixed-use properties to review their current classifications in light of this new precedent to ensure they are not overpaying. Business owners facing similar classification issues can learn more about how C&S Finance Group LLC can assist by visiting csfinancegroup.com. Moving forward, the real estate and legal communities will be closely watching for any response from the New Jersey Division of Taxation or the state Legislature. If regulators fail to act, the Edgewater decision will likely spur a wave of classification appeals from owners of similar mixed-use properties across the state, potentially reshaping municipal tax bases and influencing future development decisions.