TAX ABATEMENTS

You've been searching for your dream home for months, and with your savvy agent's help, you know the market inside and out. But suddenly a listing comes on the market that doesn't make sense: the taxes are way too low for the price and neighborhood. What's going on??

Enter the concept of the tax abatement. A tax abatement is a government-backed relief on property taxes in an effort to promote real estate or commercial development in a given area. There are various types of tax abatements, and understanding them is key to asking the right questions when putting in an offer for a property that benefits from one.

421a
Started in 1971, this is the most common tax abatement that you will encounter. While its initial intent was to promote co-op and condo development on underutilized or undeveloped land, it was overhauled in 2008 to include, among other things, a requirement that qualifying buildings set aside 20% of their units for affordable housing. The exemption usually lasts for 10 years, but may go as high as 25 years. For simplicity, let's focus on the 10-year situation: in this case, owners are guaranteed a 100% exemption from tax increases for the first 2 years, and the exemption is then phased out by 20% every 2 years. So in years 3 & 4, you'll have an 80% exemption; years 5 & 6, a 60% exemption; etc. By year 11, you'll have no benefit left, and you'll be paying your full property taxes.

J-51
This incentive will really only impact you if you own a rent controlled building. It was enacted in the 1950s to encourage owners of such buildings, who couldn't otherwise afford renovations based on their actual rent rolls, to upgrade their buildings. Owners can recoup approximately 75% of their renovation costs under J-51, but they are not allowed to decontrol rent in tandem.

Coop and Cooperative Tax Abatement
This program gives a tax abatement to any qualified co-op or condominium that applies (there are a few exceptions, which are too minor to call out here). In most buildings, this abatement will not be pushed back to the individual shareholders and owners; instead, boards will usually pass a "special assessment" in the same amount as the abatement, which offsets any benefit the shareholders would've seen. The upside here is that the board can use that special assessment money to pay for capital improvements or to cushion their reserve funds, all without raising maintenance on the owners/shareholders - it's a win-win!

​So How's This Impact Me
As a consumer, it's all about education: the more you know, the better prepared you are to tackle the process of buying and selling real estate. When looking at properties, it's important to understand whether they benefit from any of the tax abatements listed above. If so, be sure to know:

• The expiration date of the abatement
• How far into the abatement period it is
• The phase out schedule of the abatement

With this information, you'll be much more equipped to understand your potential property tax exposure over time. I stress the word potential, as even with all the property tax history in hand, it is impossible to know what will happen next year or 5 years from now. Properties are reassessed every year, and that assessed value directly impacts your property tax exposure. And (very briefly, as this topic could, and eventually will, be a whole separate blog post), coops and condos are assessed based on the revenue they would bring in if they were rental buildings. So if home prices are falling, but rental prices are going up, your assessed value may actually go up - but more on that later!

If you ever have any questions on tax abatements, or if you're ready to start your search for your perfect next home, I'm always here to help. Send me a message or give me a call!