A Few Questions For Sean Mangano And Kim Mew About Property Taxes And The Possibility Of A Reduction For Owner-occupied Residences
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Town Council will decide soon (Monday, November 7) whether to keep the same tax rate for all properties or impose different rates for residential and for commercial (and industrial) properties and, within the residential category, whether to reduce the property tax owed (called a “residential exemption”) for a unit that is the legal residence of at least one of the owners (“owner-occupied”), even if others, including renters, live there, too. One hundred and eight Massachusetts municipalities currently use a split tax rate. Amherst is one of 239 with the single rate. Only 16 or so communities provide a reduction (“exemption”) for owner-occupied units.
For the Zoom recording of the presentation about this issue to the Town Council (October 17) by Amherst’s Principal Assessor, Kim Mew, with input from town Finance Director Sean Mangano, look here. The presentation and discussion begins at about 1:28 and ends at about 2:01.
Here, I try to address two basic issues, with help from Mangano and Mew: do we continue using a single rate to assess taxable properties or change to a split rate, with different rates for residential properties (defined as property that’s used primarily for residential purposes) and for commercial or industrial properties (defined as property that’s mostly used for conducting a business, such as stores, office buildings, and hotels)? And should owner-occupied residences be given an exemption of some sort on their property taxes? The questions and responses were in writing, not in an interview format.
Indy: Although real estate investment companies are considered businesses in Massachusetts, the buildings they own, including single-family homes, apartment buildings, and large mixed-use buildings are taxed as residential. Is that written in stone? Do all towns have to follow that regulation?
Sean Mangano: Yes. Properties are classified according to their use. The use of these properties is as a residence.
Industrial properties include “any property involved in manufaturing, processing or extraction including utility real property used for storage and generation”. Do we have significant industrial property (other than utility property)?
No, less than one percent of total assessed value.
Town Council will decide on Monday whether to charge owner-occupied units the same as non-owner occupied units. For a split-rate, Kim Mew explained that the town “would make a calculation based on that unit and [its] portion of all the units…so if you have a building that has, for example, office space as well as livable units, and you live in one of those units, you’d qualify for that portion of the building.” Would the square footage of your unit be compared to the square footage of the residential and commercial units or of the building, including HVAC, hallways, elevators, and so on?
If one residential unit in a mixed-use building is occupied by the owner then that unit would qualify for the residential exemption. The calculation would be based on the square footage of that unit.
That wasn’t exactly my question. Would the square footage of an owner-occupied unit be based on the size of the unit compared to the total size of the building, including office space, indoor parking space, elevator space, and so on?
We’ll have to speak with other communities that have adopted the residential exemption to see how it works in practice. Our understanding is that a residential building with four or more units will not qualify for the exemption regardless of whether one is owner occupied. If the residential building has three units or fewer and one is owner occupied, the exemption would be applied based on the owner-occupied square footage of the building. If there’s office space, that’s commercial and wouldn’t be part of the calculation in any situation (residential exemption only applies to residential class [buildings]).
The town did a presentation last year on the residential exemption to get the best numbers on owner-occupied and non-owner occupied units, as well as scenarios of what a residential exemption would mean. They said they’d make sure it got distributed to the current councilors and to the public in time for the November 7 vote. Has it been distributed to the current town councilors yet?
Yes.
A pie chart from 2021 shown at the presentation compared percentages of housing properties/parcels (not units/residences) here that were owner-occupied and non-owner occupied. Do you know what percentages of residential units are owner-occupied today? And the percentage of people living in them?
The presentation given to the Council on 10/17 included a current estimate — that two-thirds of parcels are owner-occupied and one-third is not. Again, it was an estimate as we develop better ways to gather this information.
But that’s parcels. What about people?
This would be a question for the town clerk. The assessor’s office does not have this information.
For the larger apartment complexes, the town uses a method for assessments that involves income and expenses because it’s so difficult to assess their value in the marketplace. Is that correct?
We use the income and expense method for a few reasons, one being they don’t often sell so income and expense would give us a more up to date value.
So they’re assessed sort of as if they’re in business? How ironic, when their primary usage has to be considered residential by law.
Moving on, real estate investment companies can pay a lot more for residences than typical families and they like to rent by the bedroom, which is more profitable. When Councilor Dorothy Pam said, “Doesn’t it seem obvious to allow a lower tax for owner-occupied units, when a town needs a certain percentage of owner-occupied houses for stability?” the response was that it “might not help” low-income people because owners would pass the extra expense down to their renters. Also, some councilors stress making the town more attractive to real estate investors rather than potential residents. Wouldn’t the owner-occupied exemption help people buy their own homes?
The residential exemption results in a flat amount that is exempted from owner-occupied properties. One consequence is a higher overall tax rate that is needed to offset the exemptions. Among owner-occupied properties, there’s a break-even point where the property owner no longer pays less taxes. They pay more because the higher tax rate offsets the exemption. All this is to say that not all owner-occupied properties will see lower taxes if the residential exemption was adopted. There are about 16 communities that have adopted the residential exemption. We can speak with them to see if adopting it has increased the number of owner-occupied properties.
Are you saying that to balance the town budget, all properties in general would be taxed higher if there’s an owner-occupied exemption, and that the exemption wouldn’t necessarily cover the increase? Can you give an example or are you talking about the kind of exceptional situations that you mentioned in the presentation?
The following link provides some helpful information on how the residential exemption works. The second paragraph under “How it Works” does a better job of explaining it than I can.
With regards to the residential exemption, the presentation from Kim Mew and Sean Mangano indicated that residential properties that are held in Trust would be excluded from the exemption, as they are considered “non-owner occupied”. Some people put their homes that they own and live in into a trust because then after they are gone, their descendants will not have to deal with probate for that property. I know of a number of homeowners in Amherst who have done this, and many of them are older adults. I would be concerned about the Town approving a residential exemption if it meant that these homeowners would then face increased property taxes to fund that exemption for the “owner-occupied” homes.
Tracy Zafian
After this interview (and after being contacted by some worried Amherst residents), I learned that according to some law firms and municipal websites, trustee(s) do qualify as the owner(s) of their primary residence and their unit does qualify for the owner-occupied residential exemption. That isn’t Sean Mangano or was it Kim Mew’s understanding. Maybe this was clarified last night before the town councilors voted on it. If not, it should be clarified before it comes up again next year — the residential exemption, as well as whether to have a split or single assessment, is an annual decision.
I hear a lot about owners of rental properties passing tax increases along to tenants, but much less about rent increases in the past few years based on the hyper-expensive apartment and mixed-use buildings recently built. Kendrick Place, 11 East Pleasant Street and Aspen Heights all have raised the ceiling for rentals so high that many, many landlords have raised their rents too. Because now they look cheaper-even with higher rents. This has been reported to the Housing Trust by a town planner. So higher profits, especially on rentals bought years ago.
So to my eye, it looks like landlords can pay higher taxes without passing the increase along to their tenants–unless they choose to. Raising taxes on non-owner occupied rentals will help stop the churn in neighborhoods with investors buying small starter homes, doing small upgrades, then charging $800 to $1,000 per room. Think about this: $3200 to $4000/month times 12 months = $38,400 to $48,000/year, a nice return especially when you deduct business expenses and depreciate the property (a hefty tax benefit). Even nicer, if the landlord bought the property years ago at a low interest rate and now also has a tidy amount of appreciation. Nice ROI (rate of return on the initial investment).
Giving owner occupants a tax break would encourage more people to buy 2 family and multi-family houses, where they can also get the benefit of deducting business expenses on the rental portion (which includes taxes, lawn care, repairs, etc.) –and depreciation on that portion. It’s a great way to start out owning property. And would lead to quieter neighborhoods and better maintained houses.
The explanation of the exemption is very helpful. Thanks.
The main effect of the exemption is a generally progressive shift of the tax burden from lower valued housing units (typically occupied by lower income households) to higher valued housing units (typically occupied by higher income households).
Effectively the exemption creates a graduated tax rate with two brackets, 0% on the value up to the exemption amount and whatever % on the value above the exemption amount. The total tax collection would presumably stay the same (to meet our need for public services), and so the rate on value above the exemption would increase slightly to offset the reduced collection below the exemption.
As an objective matter, there is not a lot known about how much property taxes and changes in property tax rates are passed along to tenants. It would partly depend on whether renters are mobile to other municipalities (on the margin, not every renter). As a matter of political snark, the fact that landlords complain about the property tax implies that they can’t pass all of it along to renters. Some states have a homestead credit for renters to offset some of their property tax burden.
So my broad interpretation is that the exemption would mostly redistribute the tax burden among homeowners in a progressive direction (ie rich pay more) with taxes of landlords, of commercial properties, etc., also adjusting slightly to help to cover the reduced burden on homeowners with lower value properties.
That seems on the whole progressive.
It seems that rents for students are based on what the traffic will bear, with prices anchored by what outside investors and private dorm developers are charging. Many people, including me, are getting regular phone calls from speculators, asking if we’d sell our homes for a high cash price. The pitch says that the buyer would be local investors, and when I ask them who those local investors are, they say it depends on what houses are for sale – basically BS. Until there is some systemic solution that Amherst devises, this trend will continue to hurt our community, our neighborhoods, and students who need affordable housing. This combines with the national shortage of affordable housing, and the death of the starter home, in Amherst and everywhere.
Our town leaders need to confer with every comparable college town, to figure out how to fight this trend.
And, again, perhaps start by creating a priority list. Put this issue near the top while moving comparatively less urgent issues (e.g., new town-wide lighting scheme, street number displays-already mandated by Mass State Law) lower down in the time and energy spent chain.
James Murphy
An increase in property expenses certainly won’t lead to lower rent prices. All properties are different and it will be up to the owners to make their own determinations. It is fairly straight forward concept that adding weights on the expense side of the scale will lead to an increase in rental pricing pressure. The increase in pizza prices over the last year and a half due to increased cost of goods (according to any of the restaurant owners I spoke with) comes to mind, even though not at all an ideal analogy. Will rental property expense increases also have an impact on the rate of conversions to owner occupied? That will be determined by the market, although there are more significant factors than the tax rate.