There is a lot that goes into buying a home, many factors involving budget and financial obligations. If you’re a homeowner, or currently on the hunt for your next space, you may have heard the term tax abatement. What many homeowners don’t know is that tax abatements can be a powerful tool to reduce property tax. What exactly are they? How do they work and why should they matter to me? If you’ve asked these questions, this blog breaks down the definition, how they function, and why they can be a game-changer. Whether you’re a first-time homebuyer, seasoned investor, or considering new construction, understanding tax abatements can help you make smarter real estate decisions.
What Exactly Is a Tax Abatement?
A tax abatement is a temporary reduction or elimination of property taxes. Typically, this is offered by local governments to encourage new construction, property upgrades, or to attract residents and/or businesses to a certain area. Tax abatements are usually in effect over a set period, which could range anywhere from 5-20 years, depending on the location.
While a property tax abatement generally works as a reduction in the assessed value, it is distinct from a property tax exemption which is a reduction in the tax owed if the owner meets certain criteria such as being a veteran or being blind.
3 Common Types of Tax Abatements
- New Construction – These abatements encourage new housing or commercial properties in a certain area. This can highly benefit homebuyers, homebuilders, and developers. For example, a buyer who purchases a new construction condo in a developing complex may not need to pay full property taxes for the first several years, making the unit more financially appealing
- Major Renovations or Improvements – This helps with reinvesting in aging or underutilized properties. Homeowners can benefit from this, as do home flippers or investors turning a single-family home in multiple units. For example, a flipper who restores an aging home may not have to pay taxes on the increased valued for several years.
- Historic Property Preservation – Tax abatements can also play a big role in preserving historically significant properties. The owners of these historic properties will most benefit, as an owner who restores a registered historic home in accordance with local or state requirements may receive a full or partial tax abatement for the home.
Essentially, tax abatements are economic incentives for home buyers, builders, and investors to pursue property in a targeted area
How Do Tax Abatements Work?
Eligibility Requirements
How do you know if your property is eligible for tax abatement? The answer isn’t cut and dry. Eligibility requirements vary by city, county, and/or state. Eligibility may also be affected by the size of the property, the size of the project, and/or owner occupancy. Be sure to do extensive research on your area, and especially consult with a real estate professional, before moving forward with an application.
Application Process
If you believe your property meets the eligibility criteria, you will then need to submit an application. This can typically be done through a city hall or a county agency. When you apply, be sure to have any important documentation on hand including but not limited to documents of improvements, permits, and appraisal. Depending on the property and the location, it can take several months for an application to be approved, and may even require an inspection/
Duration and Expiration
Before moving forward with the application process, make sure you have a full understanding of the period the abatement would be in effect, and be sure you have a long-term plan in place for when the period ends. At the time of the abatement ending, you may see a big tax jump, so it’s crucial to be financially prepared.
Why Do Tax Abatements Matter?
There are a number of ways buyers and homeowners can benefit from tax abatements. Here are just a few of the many reasons:
Benefits for Buyers, Sellers, and Homeowners
- Lower Monthly Costs – Believe it or not, but reduced property tax equals lower mortgage payments. This can also help with affordability, especially for first-time home buyers.
- Potential to Afford a Higher-Priced Home – On a similar note, some buyers may even qualify for a higher loan due to lower overall housing costs.
- Attractiveness of Abated Properties – If you’re a seller, you can use your tax abatement to market your home. It may help the property sell faster due to the attractiveness of tax savings! In areas where property taxes can be especially high, this can be a huge competitive advantage.
Benefits for Real Estate Investors
- Higher Net Operating Income (NOI) – A reduced property tax can also reduce operating expenses, which can improve your overall Return on Investment (ROI).
- Redevelopment and Value-Add Opportunities – Investors can take advantage of abatements for major renovations or conversions (example: converting a multifamily to condos).
How a Real Estate Agent Can Help Navigate Tax Abatements
Tax abatements can seem like an overwhelming subject at times, but there is no one better to consult than your trusted local REALTOR®! If you’re a buyer and you’re interested in properties with tax abatements, your REALTOR® can help identify these listings in their search. Additionally, for both buyers and homeowners, your REALTOR® can help create a clear timeline and financial plan for post-abatement taxes. If you’re selling, your REALTOR® can help you market your home along with this tax benefit, so it’s the most competitive listing on the market! If you remember nothing else from this, a knowledgeable and LOCAL REALTOR® is an expert in your area and understands the specific city/town/state nuances. Ultimately, your REALTOR® will be your greatest resource and advocate!
When It Comes to Home Buying, Let Lamacchia Realty Be Your Guide!
Whether you’re a buyer, seller, or investor, tax abatements can make a real difference in your monthly costs and overall homeownership journey. The key is to know what your city or town offers, make sure you qualify, and plan ahead for when the abatement ends so there are no surprises. As your local Lamacchia Realty REALTOR®, I can help you find properties with abatements, I understand the rules, and we can use this benefit to your advantage, no matter what your real estate goals are. If you’re ready to see how a tax abatement could work for you, I’m here to guide you every step of the way.