Tax Abatements

What are tax abatements?

Updated March 14, 2022

A tax abatement is a financial incentive offered by a municipality or taxing authority that significantly reduces or eliminates the amount of taxes owed on a residential or commercial property. It is usually offered as an incentive to stimulate development in less desirable areas with low demand, or it may be offered to a specific class of buyers such as low- or middle-income earners. The abatement can be temporary and last a few months or it can be in effect for decades. It can be for new construction or it may be offered on existing buildings in need of rehabilitation and repair. Some cities issue tax abatements citywide while others limit them to certain neighborhoods or types of structures.

Tax abatements, which are also known as real estate abatements, offer a good opportunity for buyers looking for ways to lower or eliminate the property taxes they would normally be expected to pay for a particular building or piece of land. For some buyers, taking advantage of the abatement may improve their chances of qualifying for a mortgage by putting a home’s total monthly payment within their financial reach.

Tax abatements mean buyers of new condominiums get a break in taxes for a certain number of years. Photo: Gerd Altmann/Pixabay

Some properties are listed for sale with the tax abatement already in place while other programs require that the buyer apply and be approved for the abatement. Some programs also require the owners of the property with the abatement to reapply and renew their eligibility on a regular basis. This might be the case for tax abatements with maximum annual income requirements attached.

There may also be time frames attached to the abatement, allowing a set amount of time for the owner to move in and make improvements to a commercial or residential property—or lose the abatement and pay the full property taxes.

Tax abatement programs that are part of revitalization efforts for a specific area of a city are designed to bring in buyers who will improve the value and appearance of a blighted neighborhood. After the improvements have been made and the abatements expire, the properties then have a higher appraised value, meaning they can be taxed at a higher rate and bring in more income for the taxing authority.

Tax abatement programs are also designed to stimulate the local economy by encouraging new construction of homes and businesses in a designated area. Existing homes may also be sold with tax abatements on them to encourage buyers to renovate and improve the buildings.

Some types of abatements are created to encourage the construction or renovation of buildings into more energy-efficient structures. The owners are expected to use eco-friendly materials and install things such as solar panels and high-quality insulation in order to receive the abatement on their property taxes.

Some municipalities offer tax abatements to encourage historic preservation. If a buyer is willing to buy a historic building and renovate or expand it rather than tear it down, they may be eligible for a tax break on the property.

Prospective buyers should look carefully at the tax abatement that may be part of the deal and proceed with caution. Often the programs are offered in run-down neighborhoods that may have high crime rates, poor schools, lots of empty storefronts and low property values. There is no guarantee that home values will rise during the period of the abatement. In fact, the value of your home could decline during the run of the abatement and you could lose money depending on when you decide to sell.

Further, owners need to be sure they can pay the full property taxes when the abatement ends. Sometimes this can be a substantial increase, especially in expensive real estate markets such as New York City and San Francisco. They also need to be sure they can keep up with their property tax bills because the city could revoke the abatement if the owner falls behind on their tax bills.

Even with a tax abatement, there is no guarantee your property taxes won’t change. Keep in mind that the owner of an abated property is still paying a tax on a portion of the property’s value, so an increase in the tax rate or a special assessment by the municipality would make their tax bill go up. 

How are tax abatements structured?

Property tax abatements can be structured in a number of ways:

  • The owner of a building may get an abatement of a certain percentage for a number of years. For example, if a landlord receives a 50% property tax abatement for 10 years, he or she would just pay half of the property taxes they would normally pay for the next decade.
  • Abatements can also be phased in over time. A landlord might pay 10% of the normal property tax the first year, then 20% the second year and so on until they were paying the full rate after a decade.