How to Calculate Property Taxes

All home owners know about property taxes.  If you’re from the suburbs in Massachusetts, or from places like Northern California, you’ve probably heard homeowners complaining about property taxes, and seeing lots of news about property tax hikes and voters’ protests about the same.  Generally property taxes are the main way for towns to raise money to pay for their services.  For example, in Cambridge, about 60% of the town’s revenues come from property taxes.  Generally education is the largest expense–Cambridge spends ~30% on education, while a suburban town like Lexington spends ~50% on education.  The rest of the budget is allocated to important things like physical maintenance of the town, community centers, public safety, and government.

Property taxes can also vary greatly from town to town.  In the figure below, a person will pay only $1,466/yr in property taxes for her $400k condo in Cambridge.  A similarly priced home in Arlington will cost $4,380/yr in property taxes.  (Note–these #s are from FY07–many towns adjust their tax rates annually based on previous year’s income).  The practical implications of this are in a person’s monthly payment.  For example, a $300k mortgage at 5.0% over 30 years will cost a person $1,600/month.  The additional tax in Arlington compared to Cambridge is $2914/yr, or $243/mo.  $243/mo will cover an additional $45k of mortgage.  In other words, a $400k condo in Arlington will cost you the same per month as a $445k condo in Cambridge.  That’s a big difference!

Note that the property tax is usually a % of a property’s assessed value.  The term “assessed” value is a little misleading, as it is affected largely by town politics and need to raise revenue.  For example, in the current economy, properties in Dorchester tend to sell below their assessed values, while in Cambridge, properties are selling above their assessed values.  Sometimes towns will lower their tax rates only to increase their assessed values.  So make sure when calculating your property tax to use the official assessed value, and not the sale price or the appraisal value.

The basic steps are as follows, and then below I’ll walk you through specifically how to find the property tax rate on properties in Cambridge and Boston.

1. Find the website of the town the property is in.  Specifically, the assessor’s office.  Some larger towns have special property tax websites.  A google search should find it pretty quickly.
2. Input the address of the property
3. See the assessed value.  Some websites will show the actual property tax being paid, but this isn’t as informative since you don’t know if the residential exemption has been applied or not.
4. Multiply the assessed value by the tax rate.  Tax rates can be found on the assessor’s office sites pretty quickly via google.
5. Subtract the residential exemption if applicable.  You may have to hunt around the town website to figure out what the amount of the residential exemption is.  The residential exemption is a benefit that communities give to owner-occupied homes.  When you do buy a home, or if you’re already in one, make sure to apply for the residential exemption–it’s not automatically given to you!

Here’s an example of a Cambridge tax bill from the city’s annual flier:

To  understand how the property tax is calculated, do the following steps:

1. Go to the Cambridge Property Database
2. Input the address of the property
3. See the assessed value.  Let’s say the assessed value is $400k.  The tax rate is $7.72/$1000 (see the 2010 Flier on Taxes in Cambridge)
4. Multiply the assessed value by the tax rate:  $400,000 * $7.72 / $1,000 = $3,088
5. According to page 5 of the flier, the residential exemption exempts $198,423 off the assessed value, or $1,531.83 off the tax.  The final property tax amount on a condo with an assessed value of $400k in Cambridge is $3,088 – $1531.83 = $1,556.17/yr.

To see the actual tax owed on a specific property (which automatically includes a residential exemption if it has been filed for), you can look at Cambridge’s Real Estate Property Taxes site.

Boston’s property tax can be calculated as follows:

1. Go to Boston’s Assessing Online Website.
2. Input the address of the property.  Here, I picked a random house that’s currently on sale that I wouldn’t mind living in–49 Chesnut, Boston.
3. On Boston’s site, you can actually see if the residential exemption is applied or not.  See the figure below of the Assessing Online Website’s results of 49 Chestnut.  You can see that the net tax w/out exemption is $31,121.80.
4. If you are going to live in the property you are buying, then you’d need to subtract the exemption.  The Boston residential exemption is $1,486.07 off the tax amount. See the City of Boston’s 2010 Residential Exemption flier.
5. The total tax is $31,121.80 – $1,486.07 = $29,635.73.

So hopefully now you can calculate property taxes on any property you’re interested in.  Note that some very small towns may have limited online presence–don’t be shy, pick up the phone and call up the city’s office to find the #s and information that you need.  Small towns in Massachusetts tend to have very friendly folks working the government offices, and you’ll find them very helpful.  Better yet, ask your broker to do the research for you!