Tax abatements

NYC is an expensive town, so any chance to save is a real score. And when it comes to owning a home in NYC—“tax abatement” will surely put a twinkle in your eye. 

Tax abatements are various tax exemption programs; examples of these are the 421-a tax abatement, 51 tax abatement, and Condo & Co-Op Tax Abatement. Let’s figure out what all the hoopla about abatements is about. 

Tax Abatements & Exemptions: The Basics

Tax abatement: a tax break for qualified condo or co-op owners. The ‘break’ is given for a set amount of time and is given as a credit that reduces the amount of property taxes owed for that unit.

Tax exemption: a tax break for qualified condo or co-op owners. The break is given by lowering the assessed value of the unit. The lower the assessed value, the lower the property taxes.

NYC offers a whole slew of tax abatements and exemptions to developers. These tax perks encourage developers to build residential buildings (often affordable housing!) and aim to boost community and industrial development. In a nutshell, the city offers these tax breaks to encourage growth and maintain a vibrant city.

Residents in tax-abated buildings have fairly low property taxes for a set number of years, followed by a number of years where the tax increase, and eventually residents are paying the regular non-abatement property taxes.

We’re hitting this abatement first as it is the one you will most likely encounter during your search for a home in NYC! 

 The 421a tax exemption was born in 1971. It’s been used for decades to encourage the utilization or revitalization of certain areas. We all know that space is at a premium in NYC, so this program encourages thoughtful use of the bits that have fallen between the cracks or by the wayside. A major requirement for developers applying for this abatement involves providing a certain amount of affordable housing units—this presents differently for rentals and units for purchase but is at the core of the abatement either way.The benefit of the 421a tax abatement is that property taxes are reduced for a pre-determined amount of time—usually 10 years, but maybe even 15 or 25 years depending on the area. 

 The abatement sticks with the unit. So developers initially benefit from the abatement, but it gets passed on to condo or co-op owners. And if a unit still has a few years of abatement left, it can be a major bonus to potential buyers.

 The first few years that a unit is under abatement, the owner will owe only a nominal fee for property taxes, as they are essentially getting a 100% property tax abatement. After that the property taxes usually increase by 20% a year until they max out at the going rate. 

Here’s an example of how the abatement can help you out:

A building has a 10 year abatement. You purchase a unit in the building during its first year. Perhaps you decide to sell it in the 6thyear. The person who decides to buy your unit would have 4 years remaining in the abatement, so they would have a reduced property tax burden during that time. Woah. 

The J-51 property tax exemption is generally utilized for residential buildings that are undergoing planned renovations. This exemption basically forgives the post-renovation higher property assessment, so owners can still pay the pre-renovation tax rate

Owners of co-ops or condos must meet the requirements for this program—the unit in question must be their primary residence, they may not be participating in other abatement programs like 421-a or J-51, and several other stipulations. Those who qualify receive a property tax abatement from 17.5% to 28.1%–woo hoo! 

Considerations

Of course lower property taxes are a major plus, but let’s walk through some other considerations. 

  • When will the abatement taper off or end? Chat with your broker and look into changing legislation that may impact current or upcoming abatements and exemptions. Think long term: 3+ years out. Pay special attention to changes in law regarding the three exemption programs we looked at in this piece. 
  • Is the unit you’re looking at worth it? Newly constructed units are often more expensive per square foot. 
  • When the abatement starts to adjust towards the regular rate, what will you be paying? Are you ok with that number? 
  • The abatement or exemption is good for the building only. This means that you’re still paying taxes on the land and the city can up those taxes by increasing the assessed value of the land. Are you cool with that or no? 
  • Are you paying higher common charges or maintenance fees while enjoying no or low property taxes? Take a look at the history and trends of the common charges or maintenance fees for that building to get a better idea of what you’re in for and how tax exemption fits into that picture. 

Saving money is awesome, but sometimes new buildings hit you with some other big ticket prices and it’s worth looking at how all of the numbers fit together, property taxes included, before deciding if it’s the right investment and commitment for you. 

Link to NYC government website listing all abatements and exemptions:  https://www1.nyc.gov/site/finance/benefits/landlords.pa