From time to time I see people complaining on social media about their assessed value and their property taxes. There are many misconceptions out there, and quite frankly too many to list in this post as it is long enough. The truth of the matter is the MA courts ruled in the case of Bettigole vs. Assessors of Springfield “all property in Massachusetts must be assessed at full value and that fractional assessments or assessments below 100% of full value, as well as non-uniform assessments were unconstitutional.” A later decision gave the Department of Revenue control over the enforcement of this, and the Department of Revenue allows a Assessed/Sale Ratio of +/- 10%.
If you’d like to know more, the following are two chapters of a book I have been working on. If you choose to read them you should have a better understanding of how Assessed Values are determined and what role they play in your property tax bill.
If, after reading these two chapters, you have any questions feel free to reach out to me.
Annual property taxes play a factor in your overall budget. Therefore, they are something you should consider when determining the communities you are conducting your home search in. It is important to realize Assessed Values do not represent current Market Value. Often times I see a property listing stating the asking price is below the assessed value. To me, this just tells me the listing agent does not understand the assessment process.
To begin to understand property assessments it is important to realize cities and towns within Massachusetts operate on a fiscal year basis. The fiscal year runs from July 1st through June 30th. Property taxes for the fiscal year are assessed as of the January 1st prior to the start of the fiscal year. For example: Fiscal Year 2017 runs from July 1, 2016 through June 30, 2017, and the assessments have an effective date of January 1, 2016. For Fiscal Year 2017, assessments are based on property sales from calendar year 2015. Since assessments are based on historical data, they do not reflect current market conditions unless the area has had stable market conditions for multiple years. In an increasing market it would not be uncommon for the assessed value to be below current market value. Conversely, in a declining market it would not be uncommon for the assessed value to be above current market value.
If you purchase your home with a home loan, the bank will have the property appraised by an independent appraiser. The appraiser will analyze the market and research sales of properties similar to the property you are buying. Within the appraisal report you will find 3-6 comparable sales to which adjustments are made for differences between the properties. The adjusted values are then used by the appraiser to form an opinion of value. This is called the Direct Sales Comparison Approach. Depending on the type of property, the appraiser may also use an Income Approach and/or a Cost Approach to help form an opinion of value.
These are not the methods the Assessor’s Office utilizes in order to determine a property’s Assessed Value. It would not be possible to appraise each property within a municipality individually each year as all properties must be valued as of the same January 1st date. It would simply take too much time to undertake this task in the manner a bank loan appraisal is completed. Therefore, Assessors utilize Mass Appraisal which is defined as the use of standardized procedures for collecting data and appraising property to ensure that all properties within a municipality are valued uniformly and equitably. Mass Appraisal allows the Assessor to value groups of properties as of a given date using common data by employing standardized methods and statistical tests to ensure uniformity and equity in the valuations.
While individual appraisals and mass appraisals utilize similar appraisal principles and are market derived, mass appraisal requires the development of valuation tables and models which are applied to groups of similar properties to calculate values. These tables allow the use of a mathematical formula to be used to compare property characteristics which contribute to value. These characteristics include items such as square footage, quality of construction, neighborhood, lot size, etc. These characteristics become the variables within the formula which allow for comparison and adjustments to be made. The Assessor uses market sales to calibrate the model on a yearly basis to create a consistent and uniform methodology of calculating the values.
The municipality uses the Assessor’s valuations to fairly allocate the taxes needed to fund each year’s budget among the community’s tax payers. By law, assessed values are based on “fair cash value” which is defined as the amount a willing buyer would pay a willing seller on the open market. While similar to the definition of Market Value I outlined in Chapter 12, this is a much simpler version.
There is a misconception I hear often where people think the Assessor can manipulate values in order to meet the town’s budget needs. That is simply not the case for a couple reasons. First, assessed values are simply a tool communities use to equally distribute the tax burden amongst the tax payers so there is no reason to manipulate the values. Second, and more importantly, in 1961 the State Supreme Court ruled in the case of Bettigole vs. Assessors of Springfield “all property in Massachusetts must be assessed at full value and that fractional assessments or assessments below 100% of full value, as well as non-uniform assessments were unconstitutional.”
In 1974 the court also ruled, in what is known as the “Sudbury Decision,” the Department of Revenue has the power and duty to enforce the constitutional requirement of full and fair value assessments. In 1978 an amendment to the state constitution permitted property tax classification, and Chapter 797 of the Acts of 1979 identified five major classifications of property usage and defined how a split tax rate is calculated. The five classifications are Residential, Open Space, Commercial, Industrial, and Personal Property. These five property classifications became effective in Fiscal Year 1981.
Massachusetts General Laws Chapters 58 through 65 require the Commissioner of Revenue to make, and from time to time revise, reasonable rules, regulations, and guidelines as may be necessary to establish minimum standards of performance.
Let’s take a look at some of these rules and guidelines. Up until 2016 the Department of Revenue certified a city/town’s valuations as meeting legal standards every three years. Late in 2016 this protocol changed, and going forward certification will occur every five years. In the years between state certification values must still meet legal standards, however, they are not certified by the state.
A second requirement of the Department of Revenue is to conduct periodic inspections of properties. Certification guidelines require all properties be inspected at least once every nine years. You, as a homeowner, are not required to let the Assessor into your home. However, the Assessor must make an attempt.
The requirement to inspect each property periodically is important so that the property database is kept up to date. Most Assessors keep track of building permits and inspect properties when permits are closed out. An accurate database is a key component to the equitable distribution of the tax burden.
For new homes under construction, the Assessor determines a partial construction value which is added to the land value to determine the property’s value as of the January 1st assessment date. There is a provision in the state tax code, Chapter 59, 2A, which is important regarding properties under construction. This allows cities and towns to tax “buildings and other things erected on or affixed to land during the period beginning on January 2nd and ending on June 30th of the fiscal year preceding that to which the tax relates shall be deemed part of such real property as of January 1st.” Or in laymen’s terms, whatever is on the property as of June 30th is taxed as if it were present on January 1st for the fiscal year tax purposes. Not all towns utilize this June 30th date, but many do.
If you are buying new construction or a home which recently underwent major renovation it is important to keep this in mind when budgeting for property taxes. Here’s why. Let’s say you buy the home in December, but on June 30th construction was only 50% complete. For the fiscal year the assessor would determine the value of the building at 50% completion and add that to the land value to calculate the Assessed Value for the year.
In the following year the first two quarter tax bills are an estimate based on the prior year as cities and towns must have their tax rates approved by the state. In this example the first two quarters of the following year would be based on a building which was only 50% complete. Typically budgets and tax rates are not finalized until December which is the end of the second quarter of the fiscal year. Once the budget is finalized, assessed values are finalized, and the tax rate is set and approved the actual property tax for each property can be determined. Once the actual tax bill is known, any adjustments will be reflected in the third and fourth quarter bills.
In our example the third and fourth quarter bills will increase significantly since the dwelling is now complete and the Assessed Value now reflects the completed building. Many tax payers are caught off guard with this. Since most lenders include property taxes in the monthly mortgage loan payment you may see an increase in the monthly payment in the third and fourth quarters.
Another part of the state requirements involves the verification of sales data. The Assessor is only allowed to use arms-length sales which involve a willing seller not under compulsion to sell and a willing buyer not under compulsion to buy. Properties sold post foreclosure, court ordered sales such as a divorce or estate settlement, charitable donation transactions, and other types of non-arms-length sales are not included in the Assessor’s market analysis.
For tax purposes, real estate property is put into four classes: Residential, Commercial, Industrial, and Open Space. I will limit further comments to the residential class.
When analyzing residential sales, the Assessor breaks the residential class down further into Single Family, Condominiums, Two Family, Three Family, Apartment buildings (4+ units), and vacant land. State certification requires an adequate sample size when analyzing each segment of the market and sets a minimum number of qualified sales at 2% of the total number of properties of that type or 10 sales whichever is greater. This can sometimes be an issue in some of the smaller communities, and the state allows the expansion of the data to go back another 12 months if the prior year sales result in an insufficient sample size. If this is done, the Assessor may make a time adjustment to the older sales to adjust for current market conditions.
Ratio studies are then used to analyze assessment levels and uniformity. Assessment level is determined by calculating the median assessment/sales ratio (ASR) for each subclass of properties. The ASR is calculated by dividing the current assessed value of the property by its sale price. An ASR of 1 represents market value. An ASR below 1 indicates the assessment is below market value and ASR above 1 indicates the assessment is above market value. The state uses median over average as the median is not swayed by outlying sales. The state says an ASR range of +/-10% (0.9 to 1.1) is acceptable.
Certification standards require the difference in the median ASR of the residential subclass with the largest number of parcels and the median ASR of any other subclass should be 5% or less, but the median may not go below 90% or above 110%. For example, in many communities the largest residential class is single family homes. If the single family median ASR is 97%. All other classes must have a median ASR between 92% and 102% to meet classification standards.
From this brief overview you can see it would be virtually impossible for an assessor to manipulate assessments and still meet state guidelines. In the next chapter I will discuss how your property tax is calculated and touch on Proposition 2-1/2.
Calculating Property Tax & Proposition 2-1/2
Now that you have a general understanding of property assessments, let us take a look at how your property tax is calculated. As stated earlier, the assessed value is a means of equally distributing the tax burden of the community amongst the tax payers.
Your property tax is a result of the municipality’s budget. Once the budget is set and the assessments have been finalized, the tax rate is calculated. The municipality will deduct from the total budget its anticipated income from non-property tax figures. These income streams include: state funds it will receive (reimbursements, school funds, veterans benefits, etc.); estimated excise taxes; permit fees; water & sewer fees, etc.
The balance after this income is subtracted from the budget is the total levy the community needs to raise from real estate and personal property tax to cover the remainder of the budget. The formula to distribute the tax equitably is the following: Tax Levy divided by the Total Assessed Value (sum of all taxable real and personal property) = Tax Rate. This is how a single rate is calculated. Some communities choose to shift a portion of the tax burden from residential and open space properties to commercial, industrial, and personal property. This results in a split rate where residential and open space properties are taxed at one rate while commercial properties, industrial properties, and personal property are taxed at a separate rate.
The decision to shift a portion of the tax burden is made by the Selectmen or City/Town Council depending on the municipality’s form of government. However, communities are limited to how much of the levy can be shifted from the residential and open space properties.
Commercial, Industrial, and Personal Property tax payers cannot pay more than 150% of their full and fair cash value share of the levy while Residential and Open Space Property tax payers must pay at least 65% of their full and fair cash value share of the tax levy. For example, if residential and open space account for 80% of the community’s assessed value, the remaining 20% is commercial, industrial, and personal property. The commercial, industrial, and personal property class can pay a maximum of 30% of the levy (0.20 x 1.5 = 0.30). In this example the maximum shift would reduce the residential and open space to 70% which is above the 65% floor for that class of property and would be allowed.
If residential and open space accounted for 70% of the assessed value, a community could not shift the rate by the full 150% as that would put the residential and open space below the 65% minimum (0.3 x 1.5 = 0.45 commercial, 0.55 residential). In this scenario the burden could only be shifted 117% (0.30 x 1.17 = 0.35 commercial, 0.65 residential).
Some communities also grant residential and small commercial exemptions which impact the tax rate, both of which are approved by the Selectmen or City/Town Council. A residential exemption is commonly found in areas with a high number of rental properties and in communities with a large number of second homes. A community may approve a residential exemption to residential properties which are used as the principal residence of the tax payer as of January 1st. This exemption may not exceed 20% of the average assessed value of all residential properties. Adopting this type of exemption does not change the amount of tax levy paid by the residential properties. This exemption simply shifts the burden from those with moderately priced properties onto owners of rental properties, vacation homes, and higher valued properties.
Small commercial exemptions may be adopted for small businesses with no more than 10 annual employees and an assessed value under $1,000,000 and the exemption may not exceed 10% of the assessed value. Again, this does not change the amount of tax levy paid by this class of property, but shifts the burden to larger businesses.
Let’s now discuss the most popular misconception of Proposition 2-1/2. Many people think Proposition 2-1/2 means your individual bill cannot increase by more than 2.5% in a given year. That is untrue. Think about it this way. If your property has a small 1,000 square foot Ranch style home and you tear it down and build a 3,000 square foot Colonial, the value of the property would increase substantially. If your tax bill could only increase 2.5%, you would not be paying your fair share of the tax burden as your taxes could not be calculated on the new dwelling’s assessed value it would have to be based on the old building’s value which was significantly lower. It would take many years of 2.5% increases for your property to be based on the assessment of the new home which would not be fair to other property owners.
While Proposition 2-1/2 does place a limit the amount of taxes a community can raise from year to year, there are some exceptions. Before I go further, it is important you understand three terms: Levy, Levy Limit, and Levy Ceiling.
A Levy is the amount the community can raise through property tax. The Levy can be any amount up to the Levy Limit. The Levy Limit is the maximum the Levy can be in a given year based on the prior year’s limit plus allowable increases. The Levy Ceiling is the maximum the Levy Limit can be. The ceiling equals 2.5% of the sum of the communities full and fair cash value.
The total full and fair cash value includes all taxable real and personal property which can change from year to year. Personal property changes when businesses enter or leave a community or buys new equipment. Real property changes when additions to structures are constructed, homes are torn down, or when new homes are constructed.
To calculate the Levy Limit, you start with the prior year’s Levy Limit to which you can add 2.5%. The Levy Limit is based on the prior year’s Levy Limit which may not necessarily be the actual Levy collected in the prior year (See Exhibit A).
As long as it remains below the levy ceiling, permanent increases to the levy limit are made in three ways. The first is the automatic 2.5% increase which is calculated by the Department of Revenue and requires no action by local officials or taxpayers. The second is New Growth. New growth represents growth in the tax base which is tracked by the Assessor and approved by the Department of Revenue.
New growth can come in multiple forms, and Proposition 2-1/2 allows this increase to the levy limit as it often leads to additional increase in municipal costs. New growth includes: new construction; additions to existing buildings; exempt property which are returned to the tax roll; new lots as the result of subdivision; condominium conversions within existing buildings; and new personal property. New growth is calculated by multiplying the increase in the assessed value of the property by the prior year’s tax rate.
For example: A lot with a small ranch is valued at $300,000. The dwelling is torn down and replaced with a larger dwelling valued at $500,000. The difference is $200,000. If the prior year’s tax rate was $15/1,000 new growth would be calculated as $3,000 for this parcel (200 x 15 = 3,000). Increases in market value or increases due to a revaluation are not included as new growth.
The third means of increasing the levy limit is by an Override which requires a vote by the tax payers. An override allows a community to raise taxes above the automatic 2.5% and new growth as long as it remains below the Levy Ceiling. Since overrides are permanent increases, they require a majority vote by a community’s selectmen or town/city council to place the question on the ballot. Override questions are presented in dollar terms and must specify the purpose for which they are being sought. The override question requires a majority vote by the electorate.
There are also non-permanent increases which are allowed. These come in the form of Debt Exclusions and Capital Outlay Expenditure Exclusions. These allow a community to increase taxes above its levy limit or levy ceiling for the payment of certain capital projects (such as a new school) or for the payment of specific debt service costs. Both require voter approval, and the amount is added to the levy limit or levy ceiling for the life of the debt only. If the community is receiving state reimbursements for the project, the reimbursements are subtracted from the amount. Unlike overrides, these exclusions do not counted in the base upon which future levy limits are calculated.
Although extremely rare, there is also a provision in Proposition 2-1/2 which allows for an Underride. When passed, an underride is subtracted from the levy limit which creates a permanent decrease in the base from which future limits are calculated from. Like an override, underrides are voted on by the electorate.
I hope from reading these last two chapters you have a better understanding of how your property taxes come about. The budget is the main driving force behind your taxes and the assessed value is the means of equitably distributing the tax burden. Since the state allows for an automatic 2.5% increase in the total levy every year, most property taxes go up every year, even in a declining market. If your assessed value goes down but the budget increases, the tax rate will simply be raised in order to arrive at the levy required to satisfy the budget.
There are a few scenarios where your taxes could go down. The first is the elusive debt underride. Another would be if the improvements were torn down as of June 30th which results in the assessed value being on the land only. The other most common way is a community with a large increase in new growth. In this scenario the increase in the tax base helps existing properties. An older home in an area with lots of new construction the older properties would make up a smaller percentage of the fair and cash value. In this scenario, the tax rate may be reduced.