How your Property Taxes are calculated

This is a repost of the article originally published on February 1st.

Third quarter property taxes are due today. This topic interests us all and yet it is probably the least understood aspect of owning real estate. This article will attempt to explain how property taxes are calculated. I will also make an estimate for the tax rate for Marblehead for FY2016.

Let’s get started.

Tax year
The fiscal year (FY) runs from July 1 to June 30. Thus we are currently in FY2015.

What sales are used as the basis for assessments?
Assessments for the FY2015 are based upon values as of January 1, 2014, using data from calendar year 2013 sales.
It is crucial to understand this time lag. Sales occurring in 2014 will be the basis for FY2016 assessments to be announced in late 2015.

How much can taxes increase each year?
Asking this suggests you are familiar with Proposition 2 1/2, which limits the $ amount that can be raised from property taxes to a 2 1/2% increase from the prior year plus any new growth in the tax base such as new construction. Note that Prop 2  1/2 does not apply to debt exclusions or general overrides. And note also that this limit applies to the overall taxes collected, not to individual tax bills.

Click here for a brief explanation of Prop 2 1/2 on the Marblehead Town website.

Now let’s show how Marblehead’s FY2015 tax rate was calculated. Here’s a table:

The starting point is the amount of the levy for the prior year, i.e. FY2014, of $52.46 million. To this is added the allowed 2 1/2% increase and also new growth, taking the total to $54.1 million. Now add on debt exclusions of $4.9 million bringing the total levy for FY2015 to just over $59 million.

For FY2015 the total assessed value of all property – residential, commercial and personal – is $5.3 billion. Divide the tax levy, $59 million, by this $5.3 billion, and the result is a tax rate of $11.08 (per $thousand).

FY2016 Tax Rate estimate
In January this year the Town Administrator presented the FY2016 Financial Outlook to the Board of Selectmen, containing projections for the tax levy for FY2016 as follows:

Now we know how much tax needs to be raised. The tax rate will be calculated by dividing this number by the Assessed Value of all real estate for FY2016, i.e. based upon sales that occurred during calendar year 2014. In 2014 the median price of a SFH in Marblehead increased by 10% while condo prices were stable. I am going to go with an 8% increase in Assessed Values to $5.75 billion.

This will give a FY2016 tax rate of …….. $10.65 vs the FY2015 rate of $11.08. The only other factor would be any additional debt exclusions approved by voters.

Bear in mind that the tax rate will depend upon the actual Assessed Values for FY2016 and these may well differ from my estimate, but I feel that $10.65 is a reasonable number at this stage. [Note: the actual increase in Assessed Values was only 4% to $5.53 billion, so the tax rate was $11.10: $61.3 billion divided by $5.53 billion. This demonstrates that the top line – the amount to be raised by property taxes – is much easier to predict than the denominator, Assessed Values, which in turn have a great impact on the tax rate.]

Are overrides included in the tax rate?
In asking this question of several people I discovered that most assumed that debt exclusions and general overrides were a separate item. They are not. They are included in the tax rate that is announced each year. Here is the breakdown of the tax rate for the last three years with my estimate for FY2016:

Marblehead debt exclusions

What is the difference between a debt exclusion and general override?
Here are some quotes from the MA Department of revenue website:
“An override is a voted increase in the levy limit. The amount of the override becomes a permanent part of the levy limit base.The budgets adopted by town meetings in Massachusetts are affected by the Proposition 2 1⁄2 limitations upon local property tax levies. So-called overrides of these tax limitations,which allow for additional taxing capacity to fund the budget, may only be approved by a general referendum vote of all town residents.”

“A debt exclusion creates a temporary increase in the levy limit to fund the payment of debt service costs for capital projects funded by borrowing. The additional amount for the debt service is added to the levy limit for the life of the debt.”

Thus an override to fund an operating deficit becomes part of the permanent tax levy and increases occur each year from this higher base.

A debt service exclusion is temporary and disappears when the specific debt is repaid.

Marblehead’s FY2016 Financial Outlook stated: ” there is no need to consider any permanent overrides to fund the town’s operating budget. This has been the case now for 10 years.”

What does Marblehead’s debt exclusion cover?
By far the largest proportion (72%) of the FY2015 exclusion of $4.9 million relates to school costs at MHS, Village and Glover. Next at 17% is the Causeway Seawall. The balance of 11% comes from a variety of sources including the new fire truck, Lead Mills, Stoney Brook clean up, and the Landfill/Transfer Station work.

What effect would general overrides have on the tax rate?
Marblehead’s annual budget is around $70 million (property taxes contribute about three-quarters of the total revenue raised). What if MHD had a budget shortfall and asked residents to vote for a $1 million override? The next table shows the impact if this were to happen for three years in a row:
marblehead tax rate

While it is highly unlikely to impossible that this would happen in Marblehead for a number of reasons, you can see the impact sustained deficits could have on a town’s tax rate.

Low tax rates don’t just happen: they are the result of wise and prudent financial management by a town and a concerned and involved citizenry. In Marblehead we have both.

GO PATS !!!!!!!!!

If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 617.834.8205 or

Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated

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