Massachusetts real estate taxes

“From the Assessor’s Office” — A New Regular Column by Jonathan Steinberg, MAA, MACR, Chief Assessor, Town of Westborough

Along with the celebration of the holidays comes the moment of truth when communities with quarterly tax billing send out the new Fiscal Year’s tax bills. Often there is an emotional response of frustration and anger. However, take a deep breath before contacting the Assessor’s office and ask yourself two questions: “Is it my assessment that’s too high or are my taxes simply too high? Could I sell my house for the assessed value?” If your assessment seems reasonable, but you think your taxes are too high, my recommendation is to go vote at Town Meeting or contact your City Councilmen, and get involved in your local government. Don’t contact your Assessor. If your assessment is too high, it’s worth considering filing for an abatement.

There are a few things to know before picking up the phone to call the Assessor’s Office.

Most importantly, applications for abatement must be postmarked by February 1st . After that deadline, the Board of Assessors has no authority to grant abatements for the Fiscal Year.

How are real estate taxes calculated and what do these bills represent?

The Fiscal Year begins on July 1st and runs until June 30th. The first two tax bills received on July 1st and October 1st are preliminary tax bills based upon the prior year’s values and tax rate. The new Fiscal Year’s assessments are set in the fall, the community determines if there will be a split or single rate and a tax rate set by mid-December. The tax bills sent by January 1st represent the Actual bills for the Fiscal year. These bills use the new Fiscal Year’s assessment and tax rate to determine the total year’s taxes due. The preliminary amounts are subtracted. The remaining amount is divided by two for the third and fourth quarters. This calculation results in the four quarters not being the same.

Ex. Fiscal 2017 assessment of $450,000 and rate of $17.80/$1000

Fiscal 2018 Preliminary bills $450,000 x $17.80/$1000= $8,010 /4 quarters = $2,002.50

Fiscal 2018 Q1 = $2,002.50   :     Q2= $2,002.50 Total Preliminary Paid = $4,005.00

Fiscal 2018 Value set at $465,000 and rate $18.25

Fiscal 2018 taxes: $465,000 x 18.00/$1000 = $8,370.00

Less Preliminary Bills: $8,370.00 – $4,005.00 = $4,365.00

Fiscal 2018 Q3 & Q4 Bills: $4,365.00/2 = $2,182.50

The total increase in taxes is $360.00

Many take the recent tax bill just received, multiply by four. In the example above, that would represent an increase of $720.00. You can take some consolation in that the next July’s bill should be less than the bills just received.

Understanding Your Assessment

Assessed values for Fiscal 2018 are as of January 1st, 2017. They are based upon the calendar 2016 sales of similar properties. The property that sold in your neighborhood last month is not considered in the current assessments. Unlike a “Fee Appraisal” for a mortgage, Assessor’s utilize “Mass Appraisal”. Assessors analyze an entire year’s sales, looking at assessment to sales ratios and different property characteristics. The analysis compares similar properties comparing factors such as size, location, style, age, quality and condition. Utilizing a CAMA (Computer Assisted Mass Appraisal) system, they apply this analysis equitably across all the properties in Town. The effectiveness of this relies on accurate data to evaluate that people paid X for Y.

A word of caution, before proceeding. When filing for an abatement, assessments can go up if errors are found that need to be corrected.

Procedures for Filing an Abatement

The first step is to get a copy of your property record card and review the information for accuracy. Look at the measurements and details such as acreage, bath count, fireplaces, finished basement, central air, etc. Next, review the grade rating, quality and condition of the dwelling compared to other similar properties. It is key to look only at similar properties. Don’t compare your newer colonial to a 1950’s cape. Inequitable valuation is a difficult case to support since the same valuation model is applied to all properties. If there are differences in value between you and your neighbor, it will be the result of differences in data. Correct or incorrect.

Don’ts:

  • Don’t cherry pick sales and properties throwing out anything that doesn’t support your argument. Assessor’s won’t overlook these. If other properties need correction, it doesn’t make your property value wrong.
  • Don’t compare your newer colonial to a 1950’s cape. Even if the property is next door, similar properties need to be compared. If you find data errors, filing for an abatement may be worth your time.
  • Don’t simply divide the assessment by the living area and compare $/square foot. This is not an accurate comparison. Factors are not linear. This calculation does not take into account differences in acreage and interior details.
  • Don’t bring a Zillow value into the Assessor’s office as support. Zillow can be a decent tool for lists of sales, but it falls short when it comes to analysis. Any information provided from online sources should be evaluated independently rather than relying on their values. There are simply too many variables that impact value that can’t be captured by these sites. Information about comparable sales can also be found through brokers or in the Assessor’s office.
  • Don’t bring in a bank appraisal that was done on your property within the last six months. It will use comparables that are after the January 1, 2017 effective date of the assessment.
  • Don’t refuse an inspection.

Do’s:

  • Fill out the application completely and submit it prior to the deadline.
  • Clearly explain any issues with the data on the record card.
  • Select and present comparable sales that are prior to the January 1, 2017 effective date of this assessment.
  • Select comparable sales that are actually comparable. They should be similar location, age, style, size etc.
  • Provide a reasonable opinion of value that is supported by your explanation.
  • Make yourself available for an inspection within the schedule of the Assessor’s. While you are never required to allow Assessor’s into your property, denying an inspection when applying for an abatement can almost guarantee a denial regardless of the reason for application. Don’t delay the inspection. Bear in mind, that this is something you have applied for so do your best to be accommodating for the Assessor’s inspection schedule.

After the Board of Assessors has acted on your application and you’ve received notice, if still unhappy with the outcome, the next step is an appeal to the Appellate Tax Board.

In closing, remember the February 1st filing deadline, assessments can go up if other errors are found(review your record card carefully), and go back and review the “Don’ts” above before sending in your application.

Jonathan Steinberg, MAA, MACR, is the Chief Assessor, Town of Westborough

The views contained in this article are the personal views of the author, not the Town of Westborough or the Commonwealth of Massachusetts.

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Taxpayers Rushing To Claim Deductibility Of Real Estate Taxes — Prepayment Should Be OK 

As I wrote in my overview of the recently signed Tax Cuts & Jobs Act of 2017 (Tax Reform Act), for 2018, Massachusetts property owners will only be allowed to deduct $10,000 of real estate taxes and state income taxes. As a result, taxpayers have been rushing to pre-pay their real estate tax bills before year-end, in order to claim full deductibility on their 2017 tax returns.

The IRS has just issued an Advisory: Prepaid Real Property Taxes May Be Deductible in 2017 if Assessed and Paid in 2017.  The Advisory states:

The IRS has received a number of questions from the tax community concerning the deductibility of prepaid real property taxes. In general, whether a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018. A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017. State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed.

I’ve spent this morning attempting to break this down as it applies to the complex byzantine world of Massachusetts real estate property taxes.

The Massachusetts real estate tax system operate on the Fiscal Year system, running from July 1 through the following June 30. January 1 is the property tax assessment date for each fiscal year. We are now in the middle of Fiscal Year 2018 which ends on June 30, 2018. The 2018 fiscal tax bill is based on the property value assessment as of January 1, 2017. Taxpayers receive four (4) bills per year, due on August 1, November 1, February 1, and May 1. The first two quarterly bills are typically “estimates” with the subsequent two quarterly bills “actual” bills.

With respect to the Tax Reform Plan, taxpayers are attempting to pay their fiscal year 2018 third and fourth quarter bills (due 2/1/18 and 5/1/18) prior to year-end.

My assessment is that this (paying 3rd and 4th quarter tax bills before year-end) should be acceptable under the IRS Guidance because the tax obligation was “assessed” as of January 1, 2017, i.e, prior to Jan. 1, 2018. On the other hand, real estate taxes due after May 1, 2018 will likely not qualify for deductibility — even if paid in 2017.

Many tax collector offices are only accepting pre-payments on or before December 29th, so hurry up and pay!

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Tax Reform Act Alert: The Tax Cuts & Jobs Act of 2017 has dramatically changed the tax treatment of real estate taxes and mortgage interest. Please review my overview of the new Tax Act here.

One of my favorite Seinfeld episodes is the one where Kramer tries to explain to Jerry how tax write-offs work. “It’s all a write-off!” exclaims Kramer who, not surprisingly, had no idea what he was talking about. I’ve embedded the Youtube video below.

With the April 15 tax deadline quickly approaching, let’s talk about some of the taxes, deductions, and “write-offs” arising out of a Massachusetts residential real estate purchase and sale. (Disclaimer: I am neither a CPA nor tax attorney, so consult your own tax professional for specific questions).

Real Estate Property Taxes

Every Massachusetts municipality levies a real estate property tax on residential property. Indeed, the real estate tax is the primary revenue producer for most towns with a limited commercial tax base. The real estate tax rate is set by the local board of assessors and is keyed to the assessed value of your land and home, which is often less than the true market value.

Real estate taxes are generally tax deductible if you itemize your deductions on IRS Form 1040, Schedule A. At closing, the closing attorney will ensure that all real estate taxes are paid up and allocated between buyer and seller as of the closing date. If the end of the fiscal quarter is approaching, most lenders will require that the buyer pay the upcoming real estate tax bill in advance.

Most lenders these days require an escrow account for the payment of real estate taxes, and the mortgage company will actually send the payment to the assessor. However, the homeowner should check the actual property tax bill to calculate the exact amount of real estate taxes paid for the year.

Rich’s AdviceIt’s very important to keep a copy of your HUD-1 Settlement Statement on file (and for your tax preparer). Also, get a copy of your loan amortization schedule for reasons I’ll discuss later.

Mortgage Interest Tax Deduction

The mortgage interest tax deduction is typically the largest tax deduction taken by a typical homeowner. The deduction applies to interest paid on a qualifying mortgage for both a principal residence and a second home. It also applies to home equity lines and second mortgages subject to some limitation, discussed below.

If you paid any points for getting a mortgage, they may also be tax deductible, either the year paid or over the life of the loan. This applies to both purchase loans and refinances. (Check your HUD-1 Settlement Statement). The same is true for PMI — mortgage insurance premiums. They remain tax deductible for 2012 and 2013 thanks to the Fiscal Cliff Bill.

Cash out refinances and equity lines have some special rules. If you use the money for a car, a vacation, college tuition, etc., then you can deduct your interest on loan amounts up to $100,000. If you borrow more than $100,000, the interest on the excess is not deductible. However, if you use the money to make improvements on your home, then the money is treated for tax purposes as though it’s part of your home mortgage … so you can deduct all the interest, along with your mortgage interest, as long as the total amount you’ve borrowed doesn’t exceed $1 million plus $100,000.

Consult IRS Publication 936 for more information on the mortgage interest deduction.

Rich’s Advice:  At closing, I advise new buyers to speak to their accountant about whether they should recalculate their W-4 withholdings in light of their new mortgage and corresponding tax deductions. This is where that loan amortization schedule comes in very handy. New buyers often have substantially more tax deductions than before becoming homeowners, and thus, they can adjust their withholdings so they can keep more of their take home pay every week, instead of giving Uncle Sam an interest free loan!

Massachusetts Property Transfer Tax

Sometimes called deed stamps, transfer tax or excise tax, Massachusetts home sellers must pay a tax on selling their property. For every Massachusetts county except Barnstable and the Islands, the tax is $4.56 per thousand of the purchase price on the deed. So for a $500,000 sale, that’s a whopping $2,280 tax bill. There is considerable debate among tax professionals as to whether this tax is deductible on your federal and state return. It’s best to consult your tax preparer.

Capital Gains On Sale

If you sell your home for more than you paid for it, you have a capital gain, and in theory you have to pay capital gains tax. However, in most cases, you don’t have to pay taxes on the first $500,000 of capital gain on a home (or $250,000 if you’re married and filing separately). To get this special treatment, you have to have owned the home and lived in it as your primary residence for two years out of the last five years prior to the sale. Even if you didn’t own and live in the home for two full years, you might still be able to exclude some or all of your capital gain; you just won’t be eligible for the full $500,000 exception.

Other Closing Costs

Unfortunately, most of the typical real estate closing costs are not tax deductible. This includes lender origination fees, credit report, flood certification, homeowner’s insurance, appraisals, attorney fees, title abstract, title insurance, county recording fees, and real estate commissions.

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RDV-profile-picture-larger-150x150.jpgRichard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney who helps people buy, sell and finance residential real estate. If you need assistance, please contact him at 508-620-5352 or at rvetstein@vetsteinlawgroup.com.

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