Taking Advantage Of Property Tax Abatement Programs
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Lea Uradu, J.D. is graduate of the University of Maryland School of Law, a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, Tax Writer, and Founder of L.A.W. Tax Resolution Services. Lea has worked with hundreds of federal individual and expat tax clients.
Property taxes represent a major expense for most homeowners, typically amounting to 1% to 3% of the home’s value each year. This recurring expense doesn’t go away when you pay off the mortgage. It’s a perpetual cost of home ownership. Some cities offer what’s known as property tax abatement or real estate tax abatement. These programs can bring consumers significant savings, allow them to buy more home for the same price, or improve their chances of qualifying for a mortgage by putting a home’s total monthly payment within reach. As an added bonus, property tax abatement can improve a home’s resale value for as long as the abatement is in effect. In this article, we’ll take a closer look at property tax abatement programs, how you can find one when you’re home shopping and whether they have any drawbacks.
You May Still Owe Money During The Abatement Period
Even if you don’t have to pay rent during the abatement period, you may still have to make monthly payments. If your utilities are separate from your lease, you will have to continue to submit payments for them. If you receive a rent abatement, you may still have to make monthly payments to your landlord. Many leases include common area maintenance fees that cover the cost of maintaining and making repairs to shared areas in a building. In most cases, tenants are still responsible for making CAM payments during the rent abatement period.
What Does The 10
The 10-year tax abatement began in the late 1990s as a program for tax breaks on existing buildings. It was expanded to its current form in 2000 to include all new construction and rehabilitation projects. Officials wanted to encourage development, expand the citys housing stock, and boost the local economy.
Under the abatement, owners of new construction pay taxes only on the value of the land underneath their buildings for 10 years, not on the value of the buildings themselves. And owners of rehabilitated properties are exempt from taxes on the value of the improvements.
For example, a rowhouse near Frankford Avenue and Palmer Street in Fishtown that was built in 2012 has a market value of $498,600, according to the Office of Property Assessment. But the owner only pays taxes on the assigned land value of $135,942, so the annual tax bill is about $1,900 instead of almost $7,000.
And a $1.8 million condo overlooking Rittenhouse Square has a tax bill of about $2,200 under the abatement, instead of $25,000.
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Why Cities Offer Tax Abatements
In many cases, offering a property tax abatement is part of an effort to revitalize a city or a neighborhood. These programs for landlords and regular homeowners alike can serve as an incentive for new construction and renovation. These improvements to local properties can attract new residents and businesses to an area. When the abatement runs out, the property tax base may be larger. That could lead to an increase in property tax revenue in the long run.
Some cities or states offer property tax abatements as an incentive for historic preservation. Someone who is willing to buy a historic property and remodel it or expand it rather than tear it down may qualify for a tax break. If youve always dreamed of renovating a historic home, you may want to do some research to find areas that would offer you a tax break for your efforts.
Benefits Of Tax Abatements
Usually, a government only offers a tax abatement when a business or individual provides something of high value to the community. For example, a city government may give a tax break to a business in return for an investment in the city, such as a new retail location, factory, or warehouse.
This provides the added benefit of increased jobs in the area. If Target Corporation is given a tax abatement on property taxes and, in return, builds a retail location in the local community, it ends up adding many job opportunities. Additionally, it increases public good by adding convenience to the city.
A company that benefits from a tax abatement might invest in local infrastructure. A new company may need to increase the number of roadways, water lines, or power lines in the area in order to operate efficiently. While this benefits the company itself, it also benefits the community where the added infrastructure is built.
If cities want to develop land, they can designate development zones. These zones give tax abatements to any housing development in the area, incentivizing people to build homes.
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How Tax Abatement Is Targeted
The targeting of real estate tax abatement varies in some cases it covers the whole of a city, in others it applies to just a specific area of the city. The same variation applies to the status of the owners of the property. Some tax abatement programs are targeted at people in the low-to-medium income bracket, but the majority dont have income restrictions of this kind attached.
In some cases, a property can be purchased with an abatement already applying, while other properties need to be improved to a specific degree before the process of applying for abatement can even begin.
Precautions With Tax Abatements
While a tax abatement may initially seem like a good deal of which to take advantage, it does require buyers to use some precaution before agreeing to it. To start, people who are interested in tax abatements may do well to realize that these programs are typically offered on buildings or homes that are located in less than ideal neighborhoods. Crime rates in these parts of a city or county may be higher than in other locations. Likewise, property values may be much lower than elsewhere in the area. Even with a tax abatement, there is no guarantee that the appraisal value of the property will increase during the time that the owner lives or does business on it. Second, owners of tax abated properties are encouraged to prepare for the eventual expiration of the abatement. If the abatement has a finite timeline, the owner of the property should be ready at the end of the abatements term to pay for higher property taxes. This increase in taxes could take a significant toll on the owners budget. Finally, owners of tax abated properties are reminded that the abatement can be rescinded by the entity that is offering it to them. For example, if the owner of a property becomes delinquent with his or her property tax payments, the owner may have the tax abatement revoked on the property. As such, owners are encouraged to make their payments in a timely manner and to check their monthly mortgage statements if their mortgage company pays their property taxes for them.
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What Is Property Tax Abatement
Property tax abatement is a decrease in the amount of money owed to a governmental tax authority on a real property tax bill. In most jurisdictions, there are multiple programs that abate property taxes if a person or the property is eligible. An abatement is usually requested by property owners who feel that the tax assessment is too high, given the current value of the property or the owners ability to pay. The abatement proceeding pursuant to an owners appeal of an assessment is in the nature of an administrative hearing that either grants the requested relief or upholds the assessment.
Countries that allow the assessment of taxes on the private ownership of real property typically give over the right to local jurisdictions where the property is located. These local governments use property taxes to raise money for public projects and services, such as to support the police and fire departments, the public school system, or to build new roads. The amount of the tax bill is a percentage of the of the land and its improvements. An official government assessor makes this value determination.
Are There Other Types Of Nyc Tax Abatements
While 421a tax abatements get all the attention, there are actually many other types offered by NYC. If you are curious, you can find the entire collection here.
The most important abatement is arguably the Cooperative and Condominium Property Tax Abatement which reduces property taxes for apartment owners all over the city. The owner must meet the requirements but with abatements offered between 17.5% to 28.1%, the savings can be significant.
You wont see the Cooperative and Condominium Property Tax Abatement while apartment shopping since it depends on how the buyer uses the property. You may see a J-51 tax abatement though.
The J-51 program was started way back 1955 after the city mandated that all buildings needed to have basic utilities such as hot water, central heat and even indoor plumbing. A lot of landlords complained they didnt have the money to add these to their building. In response, the city implemented the J-51 tax abatement program which allowed landlords to recoup about 75% of what they spent on improvements.
Since then, the J-51 program has expanded to cover all sorts of improvements such as elevators, windows, roof work, etc. It was also available when converting commercial or industrial space to residential or a rental building into co-ops or condos.
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What To Know When Shopping For A Property
Are you okay with the idea of buying a home in an area under revitalization? And are okay with improving or rehabbing a property?
Your agent can show you homes that have an abatement already in place. They can also find information on whether a particular neighborhood qualifies for a tax abatement.
Buying a home with a tax abatement in place is the easiest approach.
But you need to ask an important question:
How many years are remaining on the abatement?
If an abatement ends in a few years or sooner, only buy the house if youre able to afford a higher tax bill in the near future.
If a property doesnt have an abatement, but is eligible, you can apply for one yourself.
The application rules differ depending on location. Some cities may allow you to submit an application for abatement before making improvements to a property.
Other cities ask homeowners to make improvements first. Only then can you apply for a tax abatement.
What Is Tax Abatement
Tax abatement happens when a local government reduces or eliminates taxes for real estate properties. Cities and municipalities create tax abatement programs for the economic development of certain areas within their boundaries.
Homeowners and property developers gain savings from tax abatement programs since property taxes reach a maximum of 3% of a propertys value every year.
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What Is A Tax Abatement
If youre considering buying a new home, a tax abatement may provide an incentive thats hard to pass up. These beneficial tax programs allow for a long-term break on your property tax bill. Savings like that will undoubtedly impact your bottom line in a positive way. However, tax abatements are only available in specific areas of certain cities, so you may need to do some digging.
Property Tax Delinquency Could End Your Abatement
If your property is paid off, its important that you stay current on any property taxes you owe.
Defaulting on your property taxes could cause the city to revoke your abatement. At which point youre required to pay the higher tax rate. If you still have a mortgage on your property, check your statement regularly.
Make sure your mortgage company pays your property taxes as scheduled.
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A Conditional Abatement Often Comes With Caveats
If your commercial lease provides an abatement when you’re unable to occupy your office, make sure to read the clause carefully. The landlord may try to add language that says if the repairs are needed due to the actions of your company, the abatement is void. This could lead to the landlord trying to blame problems on your employees like saying that a pest problem was due to not keeping the office clean. In addition, clauses may state that if the repairs will take longer than a certain period of time, your landlord has the right to cancel your lease rather than provide an abatement. Also, a lot of the time, a landlord will have you repay the rent you would have paid during the abatement period, at the end of the lease and at an escalated amount. Make sure you read your lease well and have a good tenant rep on your side during negotiations.
What Does Abatement Mean In Legal Terms
abatement, in law, the interruption of a legal proceeding upon the pleading by a defendant of a matter that prevents the plaintiff from going forward with the suit at that time or in that form. The term abatement is also used in law to mean the removal or control of an annoyance.
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Property May Be In An Undesirable Area
Remember, tax abatement programs stimulate growth and revitalization in certain neighborhoods.
So many areas eligible for abatement are in need of revitalization. This often means moving to a not-so-attractive part of town.
Other revitalization efforts might be ongoing in the neighborhood. Even so, it could be years before the area sees significant improvement.
Get A Property Tax Abatement
Property tax abatements exempt all or part of an improvement for a set number of years. This encourages new construction or rehabilitation of a property. Abatements:
- Help revitalize communities and retain residents.
- Attract home and business owners to Philadelphia.
- Reduce development costs for commercial and residential projects.
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The Downsides Of Tax Abatement
Although paying less tax may sound like a win-win scenario, there are a few negative issues attached to property tax abatement:
The properties in question may be located in a less desirable part of a city
The hoped-for improvement in that part of the city may or may not materialize if it doesnt, the property may not increase in value
The end of the abatement period will see a sudden increase in the cost of owning the property
If you want to find out more about the pros and cons of tax abatement and how it might help your business then get in touch with our experts. As well as expert tax advice we can help you with
Potential Drawbacks Of Buying A Tax Abated Property
Tax abatement lowers your property taxes. How could saving money while getting to live in a new or recently rehabbed property possibly have any drawbacks? Well, there are a few things that could go wrong.
A significant issue is that tax-abated properties are sometimes in less desirable neighborhoods. The tax abatement is an incentive to encourage people to redevelop and move into these areas. Whether revitalization efforts will ultimately prove successful is a big question mark. If the neighborhood doesn’t improve, your property value could remain flat or even decline, which could make it difficult for you to sell and possibly cause you to lose a lot of money.
If you continue to live in the home past the end of the abatement period, you’ll experience a significant jump in your annual housing expenses. It’s imperative that you keep an eye on this deadline and plan for the increase, so you’ll be able to afford it when the time comes. If you sell the property after the abatement period ends, you may have to lower your asking price to account for the increase in taxes.
Also, a tax abatement doesn’t give you complete certainty over what you’ll spend on property taxes. Even during the abatement period, your tax bill could change. Since you’re still paying tax on a portion of your property’s value, a change in the tax rate or a special assessment could cause your property tax bill to increase.
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Who Is Opposed To The Proposed Legislation
Developers and the building trades unions already defeated a proposed cap on the total value that could be exempt from taxes, which they feared would end construction of high-end condos and luxury housing. They may still push against the proposal being considered or fight for changes, such as a later enactment date.
Kenney has said he thinks the abatement works, but hes willing to sign a reform bill passed by Council.
Some advocates for eliminating the abatement may also criticize the legislation for not going far enough.
If people feel like this is the only thing we will do on this issue I could understand some of the pushback, said Councilwoman Helen Gym, who has long sought changes. But this is a first step, and therell be more that we need to do.