The Residential Exemption

The Residential Exemption


Welcome. This presentation will review
the residential exemption, an optional property tax exemption that can be
adopted by Massachusetts’ cities and towns. We will define the exemption,
review how it works, and walk through how the exemption is calculated. The
residential exemption is a property tax exemption that reduces the taxable
valuation of each residential parcel that is a taxpayer’s principal residence.
It cannot exceed 35% of the average assessed value of all class one
residential parcels in a city or town. The exemption shifts the property tax
burden within the residential property class in two ways: From lower value to
higher valued residential properties and From property owned by year-round
residents to the vacation homes and other residential properties not the
principle residence of the taxpayer. This exemption increases the residential
class tax rate due to the reduction in assessed value, but does not change the
amount levied in property tax from the residential class. It is important to
remember that the residential exemption does not lower the property tax burden
for all property owners in the residential class. Now, we will walk
through how the value of the residential exemption and its impact are calculated.
In this example, the total assessed value of residential property in a town is $4.8
billion. This value is divided by the total number of residential parcels,
which is $9,625 in this town. This means that the
the average value of a residential parcel is $498,701. This average is multiplied by the
locally selected residential exemption percentage which cannot be greater than
35%. In this example, the selected percentage is 20%. This results in
a residential exemption amount of $99,740 per parcel. Once this average has been calculated, it
is multiplied by the number of residential class properties eligible
for the exemption, which in this example is 6,428. This results in a total residential property exemption value of
$641,128,720 to the town. The total residential value, $4.8 billion less the exempted value, $641,128,720 equals the net amount of
taxable residential value of four billion one hundred fifty-eight million
eight hundred seventy one thousand two hundred and eighty dollars. This net
assessed value is then used to calculate the current fiscal year’s residential
class tax rate reported on the tax rate recap. The break-even point, sometimes
referred to as the point of benefit neutral assessment, is the point where
the property tax burden begins to shift from higher valued properties to lower
valued properties. This is the point where a residential class property tax-
payer begins to pay less or more property tax than if the exclusion
wasn’t voted at all. With the same information from the example the town
used to calculate the value of the exemption, we will now walk through how
the break-even point is calculated. The total residential class property value,
$4.8 billion, is divided by the number of parcels eligible for the
residential exemption, six thousand four hundred and twenty-eight. This equals a
break-even point of seven hundred forty- six thousand seven hundred and thirty-
three dollars. This means that residential properties with values
greater than seven hundred forty-six thousand seven hundred and thirty-three
dollars would pay more in property tax if the exemption were to be adopted.
Residential properties with values less than seven hundred forty-six thousand
seven hundred and thirty-three dollars would pay less in property taxes if the
exemption were adopted by the town. Here are four examples of how the break-even
point works. Let’s assume that properties one, two, and three, all located in
the same example community, have all met the eligibility requirements for the
residential exemption. Remember, the break-even point for this community is
seven hundred and forty-six thousand seven hundred and thirty-three dollars.
Property number 1 has an assessed value of six hundred thousand dollars.
Without the residential exemption and with a tax rate of eleven dollars and
thirty-two cents per thousand, the taxpayer will pay a residential class property tax
bill of six thousand seven hundred and ninety-two dollars. With a residential
exemption of ninety-nine thousand seven hundred and forty dollars and a new tax
rate of thirteen dollars and six cents per thousand, recall that the tax rate
needs to increase if using the residential exemption, the property’s tax
bill is six thousand five hundred thirty- three dollars or two hundred fifty-nine
dollars less than the tax bill without the residential exemption. Property
number 2 has an assessed value equal to the break-even point. Without the
residential exemption, the taxpayer will pay a residential class property tax
bill of eight thousand four hundred and fifty-three dollars. With the adopted
residential exemption and a new tax rate, the property’s tax bill is eight
thousand four hundred fifty dollars or three dollars less than the property tax
bill without the residential exemption. Property number 3 has an assessed
value of eight hundred thousand dollars. Without the residential exemption and
with the tax rate of eleven dollars and thirty-two cents per thousand, the taxpayer will
pay nine thousand fifty-six dollars. Because this assessed value is greater
than the break-even point, and with a residential exemption of ninety-nine
thousand seven hundred forty dollars and a new tax rate of thirteen dollars and
six cents per thousand, the property’s tax bill is nine thousand one hundred
forty-five dollars or eighty-nine dollars more than the property tax bill
without the residential exemption. Finally, let’s assume that property number
4 is not eligible for the residential exemption because it is owned by a
non-resident and has a assessed value of $700,000. Although this
value is less than the break-even point, without the residential exemption and
with a tax rate of eleven dollars and thirty-two cents per thousand, the taxpayer will pay
a tax bill of seven thousand nine hundred and twenty-four dollars. Because
property number 4 will not receive a residential exemption, and with a new tax
rate of thirteen dollars and six cents per thousand, the property’s tax bill
will be nine thousand one hundred forty- two dollars, one thousand two hundred
eighteen dollars more than the property tax bill without the residential
exemption. If there is any group of residential class property taxpayers
that the city or town does not wish to burden with additional property tax,
officials should note where its members fall in terms of properties shown in
these examples. A municipality should answer several questions while
considering whether to adopt the residential exemption, including: What is
our purpose in adopting this exemption? Do we expect a certain outcome?
How will we determine whether the outcome or outcomes has or have been
achieved? Should the exemption with the greatest percentage be approved in the
first year? Should the exemption be adopted for this fiscal year or for the
next? Can an increase to other property tax exemptions be approved to
meet our intended goal or goals? To adopt the residential exemption, a city or town
must be certified by the Commissioner of Revenue should be assessing its property
at full and fair cash value. This certification is granted through the
Division of Local Services Bureau of Local Assessment’s five-year
certification review or interim review. The decision to adopt the exemption is
made depending on the structure of the municipality. In a town, the select board
will decide. In a city, the mayor, with the approval of the city council, will decide.
A vote to adopt the exemption is usually taken at the select board or city
council’s annual classification hearing, but the vote may be taken at a prior or
later meeting. As a reminder, the exemption percentage may be
equal to, but not more than, 35% of the average assessed value of all class
one residential parcels in the city or town. A parcel of real property, as
defined by the local assessors in accordance with the deed for the
property, must be classified as a class one residential to be eligible for
the residential exemption. Assessors may rely exclusively on records of the
Registry of Deeds and Registry of Probate to determine ownership. The
taxpayer must own the property and it must be the taxpayer’s principal
residence used for filing Massachusetts state or federal income tax forms as of
January 1st. If a residential parcel is classified as multiple use, a property
that is part residential and part commercial, only the portion considered
residential may be eligible for the exemption. A condominium unit, together
with its interest in the common areas and facilities, may also be eligible. A
parcel of land for a manufactured or mobile home, owned by a cooperative
corporation as defined in Massachusetts General Laws Chapter 157 B, section 4, may
also be eligible provided that the member meets all exemption requirements
and acceptance of this provision is separately voted by the city or town’s
legislative body. A residential exemption is governed by Massachusetts General
Laws, Chapter 59, section 5C. Other exemptions to the property tax are
allowed under the various clauses of Chapter 59, section 5. Unless a property
owner is fully exempt under any clause of section 5, the residential exemption
cannot reduce a property’s assessed value below 10% of its full and fair
cash valuation. An annual application for a residential exemption is not
needed, but if a taxpayer does not receive the exemption or if the taxpayer
did apply for a residential exemption and did not receive it, the taxpayer may
appeal. The taxpayer must appeal in writing to
the local board of assessors on a form approved by the Massachusetts Department
of Revenue used to process other abatement requests. The form must be
received by the assessors on or before April 1st, or three months after the date
tax bills were mailed, whichever is later, or the taxpayer loses their right to
appeal. If the assessors deny the application for exemption, the taxpayer
may appeal further to the Commonwealth’s Appellate Tax Board or County
Commissioners. This slide shows the first page of the tax rate recap. In the
calculation boxes, note that column “d” includes both the total residential
class assessed value, $4.8 billion, and the net residential class assessed value, 4
billion one hundred fifty-eight million eight hundred seventy-one thousand two hundred eighty
dollars. The lower residential value is used to calculate the residential class
tax rate of $13.06 per thousand. The residential class tax rate
is greater than eleven dollars and thirty-two cents per thousand tax rates for the
commercial, industrial and personal property classes due to the exempted
residential value. The total residential class assessed value of $4.8
billion is used to calculate the community’s total property value across
all property types, which in this example totals $4.925 billion.
This is important to note, as the total community value is multiplied by 2.5% to
establish that fiscal year’s Proposition 2 1/2 levy ceiling. This slide
shows an example of a real estate tax bill as it appears in the annual
Informational Guideline Release issued by the Division of Local Services. For
semi-annual billing communities, it’s an example of the first-half actual
residential tax bill. For semi-annual optional, semi-annual preliminary, or
quarterly tax billing communities, it’s an example of the first actual
residential tax bill. The circled area shows where the residential exemption amount
is shown to the taxpayer. To learn more about this topic, or for contact
information for the Division of Local Services, please visit mass.gov/dls.

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