WTF Wednesday: What is a property tax abatement and why does it matter?

What is a property tax abatement and why does it matter?

Lets break this down in two parts.

What is a property tax abatement?
In the most simplest form, a tax abatement is exactly what it sounds like: a break on a building or an apartment's property taxes. Lets take it further, a property tax abatement is when the government grants a reduction or exemption from taxes for a specific period in order to stimulate real estate or industrial development.

There are many types of abatements given to buildings for different reasons. Perhaps the most well-known and for condo buyers the most important is the 421a abatement, which recently expired, but gave developers (and therefore individual owners in buildings, as well) a big break on taxes in exchange for including a certain amount of affordable housing in their projects.

Tax abatement programs have a significant impact on what and where developers can afford to build in New York City, which in turn has a big effect on neighborhood housing markets. New York City has several tax abatement programs in place. For residential purposes though we will focus on three the J-51 Program, the 421a Program, and the Cooperative and Condominium Abatement.

The J-51 Program gives abatements to residential apartment buildings undergoing renovations. It was created in order to incentivize owners of rent-regulated buildings to make improvements to those buildings. Through the program, owners are able to recover approximately 75% of the costs of the improvements. Normally, owners upgrading a rent-regulated building are allowed to raise rents according to the luxury decontrol provisions of the rent stabilization law, HOWEVER, when a building is receiving J-51 money, it is not allowed to decontrol rent. Therefore, J-51 benefits are only advantageous in areas where the market rates are close to or below rent stabilized rate

The 421a Program is meant to promote the building of condos on underutilized or unused land. As explained by the Times, in most cases, "the exemption lasts for 10, 15 or 25 years, giving owners a 100 percent exemption from any increases in their real estate taxes for X amount of years then phasing out the exemption by 20 percent over the remaining years.

Cooperative and Condominium Tax Abatement Program:
This program gives tax abatements to Residential Class 2 properties (condos or co-ops with more than three units.) Any unit in a Class 2 building is eligible except units receiving any other type of abatement, sponsor units, units that are used for non-residential purposes, and three or more units in one building owned by the same person.

2) How do tax abatements actually affect the typical New York City buyer or renter?

For renters, 421a doesn't have much impact, unless you're lucky enough to snag one of the subsidized rentals in an 80/20 building. The more important one to know as a renter is the J-51 tax abatement, which landlords receive for major renovations to a building. It won't make your rent lower, but there's one crucial rule that will make a big difference for you: As long as your landlord is receiving a J-51 tax abatement, your apartment should fall under rent-stabilization.

If you're buying into a building with an abatement, that can mean you save serious cash on your monthly costs. While there aren't as many buildings with tax abatements left on them you can still find some in areas such as Williamsburg, Chelsea and the Financial District. For instance, if you were to purchase our listing at 446 Kent Avenue, PHD which has a 25 year tax abatement until 2032 you continue to pay $10 a month until the last 5 years when it will start phasing out. See generally, a tax abatement will last for a set amount of time (for example, 15 years or 30 years ), with taxes slowly ramping up by a certain percentage point over time usually in 20% increments for the last 5 years.

The appeal of lower taxes can raise the asking price of an apartment with an abatement; on the flip side, as the abatement draws to a close, a seller might have to lower their asking price to incentive buyers who know their monthlies are going to increase. This is why it is important for a potential purchaser to check to see when a building's abatement began, and how long it's going to last, so they know how long it will benefit them. Your broker should be able to get this information but this will also be done during your attorney's due diligence research on the building.

Check our our collection of properties with property tax abatements.

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