Buying in a Building with a Tax Abatement: What Every Buyer Should Know
Buying in a Building with a Tax Abatement: What Every Buyer Should Know
Buying a home in New York City is a complex process, and you'll encounter a variety of terms and programs that can significantly impact your finances. Among the most enticing—and sometimes confusing—are properties with a tax abatement. These can offer a powerful financial benefit, but they also come with a set of risks that every potential buyer must understand. This article breaks down what a tax abatement is, the different types you'll find in NYC, and the key benefits and risks to consider before you make an offer.
What Is a Tax Abatement?
Simply put, a tax abatement is a temporary reduction or elimination of property taxes granted by the city or state. These programs are typically used as incentives to encourage new construction, housing rehabilitation, or the development of affordable housing. For buyers, the result is lower monthly carrying costs, which can make an otherwise unaffordable apartment suddenly feel within reach.
However, it's crucial to remember that this tax break is not permanent. The abatement is granted for a specific period (e.g., 10, 15, or 25 years) and will either end abruptly or phase out over time, at which point you will be responsible for the full, unabated property tax.
The Most Common Types of NYC Tax Abatements
While there are many different tax incentive programs in New York City, buyers are most likely to encounter three main types when searching for a residential property.
1. The 421-a Tax Abatement
The 421-a program, while expired for new projects, is the most well-known and widely discussed abatement. It was designed to incentivize developers to build new multi-unit residential buildings. In exchange for the tax break, developers were often required to designate a percentage of units as affordable housing.
Who it's for: Owners of new construction condos and co-ops.
How it works: The abatement typically lasts for 10 to 25 years. The amount of the tax reduction phases out gradually over the second half of the term. For example, a 15-year abatement might provide 10 years of full tax exemption followed by a 5-year phase-out period where taxes increase by 20% each year until they reach the full amount.
2. The J-51 Tax Abatement
The J-51 program is designed to encourage the rehabilitation of residential properties and the conversion of commercial buildings into residential use. Unlike 421-a, which applies to new construction, J-51 is all about renovations.
Who it's for: Owners in renovated or converted residential buildings.
How it works: The J-51 program is a combination of a tax exemption (which freezes the building's assessed value at pre-renovation levels) and a tax abatement (which reduces the property taxes owed). The term of a J-51 abatement can vary but is often between 14 and 34 years.
3. The Co-op & Condo Tax Abatement
This is a recurring program that provides a direct property tax reduction to co-op and condo owners who use their unit as their primary residence. It's not a temporary incentive for new development but rather an ongoing benefit for eligible homeowners.
Who it's for: All co-op and condo owners who meet income and residency requirements.
How it works: The reduction percentage is determined by the average assessed value of the residential units in the building. It can range from 17.5% to 28.1%. The co-op or condo board is responsible for applying for this abatement on behalf of the building each year.
Q&A: The Benefits and Risks of Buying an Abated Property
Buying a property with an abatement can be a smart financial move, but it's essential to look at both sides of the coin.
Q: What are the primary benefits of a tax abatement?
A: The most significant benefit is lower monthly carrying costs. This can be especially helpful in the early years of ownership when you're managing a mortgage and other expenses. For example, a $1.5 million condo with an abatement might have monthly taxes of $100, while a comparable unit without an abatement could have taxes of over $1,000. This saving can allow you to purchase a larger or more desirable apartment than you could otherwise afford.
Example: Condo with 421-a Abatement | Without Abatement (Comparable Unit) |
Purchase Price: $1,500,000 | Purchase Price: $1,500,000 |
Monthly Property Tax: $100 | Monthly Property Tax: $1,200 |
Monthly Common Charges: $900 | Monthly Common Charges: $900 |
Total Monthly Carrying Costs: $1,000 | Total Monthly Carrying Costs: $2,100 |
Savings Per Month: $1,100 | Savings Per Year: $13,200 |
Q: What are the biggest risks?
A: The primary risk is the "sticker shock" when the abatement expires. Your property tax bill will jump to its full, unabated amount. This can be a significant financial burden if you haven't planned for it.
The second risk, particularly for rental buildings with abatements, is that the building's tax benefit is often tied to rent stabilization for a period of time. Once the abatement expires, the building can exit rent stabilization, and landlords can raise rents to market rates. While this doesn't directly affect buyers in condos or co-ops, it's an important point to be aware of if you are considering purchasing a unit in a building that has both market-rate and rent-stabilized units.
Q: How do I calculate what my taxes will be after the abatement expires?
A: It’s vital to perform this calculation before you buy.
For Condos: The building’s offering plan should state the full, unabated taxes at the time the plan was filed. While that number will be outdated, you can find the current assessed value of the building on the NYC Department of Finance website. A good real estate attorney can help you determine the current full tax rate and give you an accurate estimate.
For Co-ops: This is slightly more complex as you don't directly pay property taxes. Instead, you pay a portion of the building’s total tax bill as part of your monthly maintenance. To estimate your share of the taxes post-abatement, you need to find the full tax amount for the entire building on the Department of Finance website. Then, divide the number of shares for your specific apartment by the total number of shares in the co-op building. This gives you your percentage of the total tax bill.
Tips & Takeaways
When considering an abated property, a savvy buyer focuses on the long-term.
Don't Overextend Yourself: Buy a property that you can comfortably afford without the tax abatement. Treat the lower monthly costs as a bonus or an opportunity to build a stronger financial cushion, not a reason to stretch your budget.
Plan for the Future: Use the savings from the abatement to prepare for the inevitable increase in taxes. You can put the extra money into an investment account or a high-yield savings account so that when the tax bill goes up, you're ready for it.
Do Your Homework: Don't just rely on the listing's promised tax numbers. Work with your real estate attorney and a knowledgeable broker to verify the abatement's expiration date, the phase-out schedule, and an accurate estimate of your future tax burden.
Ask the Right Questions: Ask the building's managing agent or board about the abatement. They can provide key insights into when it expires and what the current tax status is.
By understanding the mechanics of a tax abatement and planning for the future, you can confidently navigate the NYC real estate market and secure a great deal.
Ready to find a property with the right financial fit? Our team at Yeo Real Estate has years of experience helping buyers and sellers understand the nuances of the New York City market. Contact us today to get started on your search.