So how do tax abatements work?
The Lawton Family on the whole has an extremely hard time sitting still for more than 15 minutes; however growing up, we would watch TV some nights and switch the channel every 5 minutes – probably explains a lot. While extremely annoying, there was always a consistency to that change – the History Channel, a show with guns and a strong male lead (Walker Texas Ranger, CSI Miami, 24, Rambo, etc.), something Duck Dynasty-esque, and old NBA games with Larry Bird. My favorite regular choice was Ancient Aliens, which if you haven’t seen, get your feet wet by googling “the Moai Easter Island” – welcome to the rabbit hole. Since I’m not trying to completely discredit my college degree, I’ve mastered the art of talking about extra terrestrials with some thin thread of academic rationale barely holding together my obtrusively heavy conspiracy theories. So recently with a friend, we somehow ended up talking about Area 51 or comparably weird topic, and once things started getting good, she pulled a 180 to real estate:
“So I was on Streeteasy and, ok kind of lost: what’s a tax adatement?”
Me, on the verge of effectively rising to Bill Nye the Science guy status, having my conversation get mangled in the style of Tonya Harding’s attack on Nancy Kerrigan.I understand the rationale behind this question, as tax abatements can be somewhat vague in listings and there isn’t really a definitive answer as to what will happen when the abatement expires. So for the least exciting and most professional thing I’ll discuss in this newsletter, let’s quickly discuss tax abatements.
Spark Note Answer: A tax abatement is when the government grants a reduction or exemption from taxes for a specific period of time in order to stimulate real estate or industrial development.
How it works: Since the 1970s, New York City has offered 421-A tax abatements – temporary tax reductions – as an incentive for developers to build affordable housing, either as part of the new development they’re building or in a separate project within the same district. As such, many newly constructed buildings offer abatements for varying lengths of time. The program typically gives a buyer a 10-year tax break, but it can also go as long as 25 years. The more that the city wants to stimulate development in certain areas, the longer the abatement will tend to be. The taxes start out low and phase in over the length of the abatement–typically going up by 20% every two years–so that at the end of the term, the taxes are at full value and should be equal to similar properties without abatements or whose abatements have expired.
When it comes to purchasing, the tax abatement you will most likely be seeing is the 421-A, which was a program put in place to stimulate affordable housing. This is slightly backwards because these benefits are tied to high-end luxury sales. The 421-A program expired January (the month before 7,000 building permits were filed), which is a huge issue in the battle of residential developers vs. the Mayor and his City Rezoning plans.
Why they’re great for buyers: Buying into a building with an abatement in place, assuming you really want to live there and you aren’t living on a fixed income (so you can absorb the post-abatement rate), is advantageous to buyers as the money you save over the abated period of time could go towards savings, your mortgage or other frivolous life purchases.
Do your homework: Remember, a tax abatement can be a wonderful perk, but you have to do your due diligence. While there is no way to put a finger on the exact dollar amount you’ll pay when it expires, there are ways to roughly estimate that amount. It should always be something to keep in mind for expenses down the road post-closing.