This article came in the e-newsletter today from the DOR’s Division of Local Services, describing the residential exemption that towns can adopt that shifts real estate taxes from less valuable properties to more expensive properties and properties owned by non-residents.
Understanding the Residential Exemption
Tony Rassias – Bureau of Accounts Deputy Director
The residential exemption, MGL c. 59, s. 5C, is a not-oftentimes voted provision of the 1979 classification law that shifts the tax burden within the Residential class from the lower valued properties to the higher valued ones and to those owned by nonresidents. This article will take a look at the exemption’s requirements, how the exemption works and will conclude with some frequently asked questions of the Division of Local Services.
The residential exemption may be voted annually by the board of selectmen or by the mayor with the approval of the city council. The vote is customarily taken at the annual classification hearing, but the vote may be taken prior to that time. In addition, the exemption:
- By statute may be no more than 20 percent of the average assessed value of all class one, residential parcels;
- Bay be applied to a residential parcel that is the owner’s principal place of residence as of January 1, as used for state income tax purposes;
- May be granted in addition to any other exemptions allowable under MGL c. 59, s. 5 as well as in addition to the Community Preservation residential exemption;
- May not reduce the taxable value of the property to less than 10 percent of its full and fair cash value, except through the application of the hardship exemption, and the exemption for paraplegic veterans and their surviving spouse.
In this example, the Total Residential Value (A) is divided by the Total Residential Parcel Count (B) to yield an Average Residential Value (C). This Average Residential Value (C) is then multiplied by the Selected Residential Exemption Percent (D) to yield the Residential Exemption (E).
On the Tax Rate Recap
Once the exemption has been calculated and voted, both the Total Residential Value (A) and the Total Residential Value minus Exemption (H) are transferred to the Tax Rate Recap.
The Total Residential Value (A) is used to calculate the classification percentages and to determine Prop 2 1/2’s levy ceiling (Editor’s Note: For more information on the Levy Limit, please see our recent three part series on the subject.)
The Total Residential Value minus Exemption (H) is used to calculate the residential class tax rate. By reducing the Total Residential Value (A) by the Total Residential Exemption Value (G), the residential class tax rate will increase, the total tax levy for the residential class will remain the same and the property tax burden will shift as intended.
The Break-Even Point and the Burden Shift
The break-even point, or point of benefit neutral assessment, is that point (actually a dollar spread due to rounding) of assessed valuation less the exemption at which the tax burden for residential class properties begins to shift, i.e. when the residential class property taxpayer begins to pay less or more property tax than if the exclusion wasn’t voted at all.
Using the example from above, the Break-Even Point (I) can easily be calculated as the Total Residential Value (A), divided by the Number of Eligible Residential Parcels (F).
On the Tax Bill
Once the tax rate has been certified by the Bureau of Accounts, the exemption is applied to the 6,428 eligible residential parcels identified in F above on the first actual tax bill. A location on the front of the real estate tax bill must show the exemption amount and on the back the abatement application deadline. An aggrieved taxpayer who did not receive the residential exemption may file an application for abatement to the Board of Assessors within three months of the date the actual tax bill was mailed.
Now let’s look at four example residential properties and see how the break-even point and the residential exemption work. Let’s assume a residential tax rate of $11.32/000 without the exemption and $13.06/000 with the exemption.
As shown in Chart 1, Property #2 shows the break-even point and a “neutral” tax bill, with or without the exemption. Property #1, which is below that point, has a tax savings with the residential exemption while Property #3, which is above that point, has an additional cost with the exemption. Property #4 belongs to the nonresident and although below the break-even point, has a greater cost than the higher valued Property #3 because the nonresident does not receive the exemption.
Communities with the Exemption
Because it is an annual acceptance, the number of communities voting the exemption could vary each year. Generally, however, about the same communities vote the residential exemption each year and have for many years. The 13 communities that have voted the residential exemption for FY2014 are Barnstable, Boston, Brookline, Cambridge, Chelsea, Everett, Malden, Nantucket, Somerset, Somerville, Tisbury, Waltham and Watertown.
Communities voting the exemption can be characterized as large cities or towns with many non-owner occupied properties such as apartment buildings or investment properties and/or resort communities with many seasonal residents.
Frequently Asked Questions
What type of application form is used to file for an abatement of the residential exemption?
The taxpayer may use the residential exemption application form approved by the Commissioner of Revenue or the regular abatement application form.
If a residential exemption is granted by the board of assessors after a properly filed application for abatement, what account is charged?
Because the exemption was sought by way of abatement, the Overlay is charged.
What are the qualifications for receiving the residential exemption?
The taxpayer must own the property (be the holder of record title) and occupy the property as their principal place of residence as of January 1, as used by the taxpayer for state income tax purposes. The exemption is not applied to summer homes or to accessory land incidental to a residential use. Determining eligibility could prove problematic and a disincentive to adopt the law at all. The community may want to delay adoption of the exemption for the first year, possibly even for one fiscal year, to allow for proper domicile and ownership research.
What if the applicant does not file an income tax return?
The board of assessors may use municipal records such as census data, street lists, voter records, motor vehicle registrations or licenses and other credible information in lieu of the tax return or may request other information from the taxpayer. It is recommended that the board consider creating a policy as to what type of information would be considered and apply the policy in a consistent and uniform manner.
Will this exemption help the elderly?
Be careful! Oftentimes the elderly convey their property to a trust where they may possibly lose legal and/or beneficial interest in the property and disqualify themselves from the exemption. Also, the elderly may own property valued greater than the break-even point. In these cases, voting the exemption to help them may in fact place an additional burden upon them.
If you need more assistance on this topic, you may review IGR 14-401 on the topic, try the Residential Factor Calculator on the DLS website or contact the Division of Local Services at 617-626-2300.