Property taxes are a perpetual cost of home ownership that doesn't go away when the mortgage is paid. In the United States, property taxes are a source of revenue for state and local governments and account for over 30% of total state and local tax collections.
Some cities offer what's known as property tax abatement or real estate tax abatement. Abatement programs allow consumers to get more for their money and improve their chances of qualifying for a mortgage by putting the monthly payment within reach. Property tax abatement can improve a home's resale value for as long as the abatement is in effect.
Key Takeaways
- Tax abatement programs reduce or eliminate the property tax homeowners pay on new construction, rehabilitation, or improvements.
- Consumers can buy a property that already has an abatement or can purchase an eligible property, make the required improvements, and apply for the abatement.
- Abatement programs attract buyers to locations with lower demand, such as city neighborhoodsbeing revitalized.
Accessing Property Tax Abatement
Tax abatement programs can eliminate or significantly reduce property tax payments on a home for years or even decades. These programs attract buyers to less popular areas, such as city neighborhoods with revitalization efforts. Some cities offer tax abatements citywide, while others only offer them in designated areas.
Consumers can buy a property with an abatement, purchase an eligible property, make the required improvements, and apply for the abatement. The first option is easier because someone else has completed the construction phase.
Examples of Abatement Programs
Cleveland, Ohio
Tax Abatement is available to homeowners and developers, and programs range from 85% to 100% for 15 years of tax abatement, depending on the project, as of 2024. Rehabilitation or new construction must occur within Cleveland and be completed under a valid and accurate permit issued by the City of Cleveland Department of Building and Housing.
St. Louis, Missouri
New construction on vacant land or a gut rehabilitation of an existing building is eligible for a property tax abatement lasting five to 10 years. During this period, the property tax rate is frozen at the property's value before the improvements.
Portland, Oregon
In Portland, the Homebuyer Opportunity Limited Tax Exemption (HOLTE) Program offers a 10-year property tax exemption on single-unit homes for structural improvementsto the homeas long as the property and owner remain eligible per program guidelines.
Property owners are still responsible for payment of the taxes on the assessed value of the land during the exemption period.Property owners only pay tax on the value of the property before the rehabilitation or new construction. As of 2023, the property's sale price must be $455,000 or less.
Philadelphia, Pennsylvania
Philadelphia offers a 30-month abatement for new residential construction or improvements to existing, unoccupied residential homes. A 10-year abatement program is available for those who improve existing residential properties that contain one or more units or deteriorated industrial or commercial business properties.
Des Moines, Iowa
Property tax abatement percentages vary depending on the type of improvement and property location. New construction and rehabilitation projects are eligible for abatement for five years anywhere in the city on a declining schedule; properties in other specified locations are eligible for a 10-year abatement on a declining schedule.
California
The Mills Act provides tax incentives for the restoration and preservation of qualified historic residences. Local governments negotiate these property tax abatements on a case-by-case basis with owners of qualified historic properties. Owners may achieve property tax savings of 40% to 60% per year.
Property tax abatement programs may be offered to incentivize the construction or redevelopment of buildings that offer affordable housing units.
Benefits
Tax abatement programs won't eliminate a property tax bill, but the savings can be substantial. A tax abatement program could save property owners money each month. A homeowner without abatement might spend $3,100 annually on property taxes, totaling $31,000 over ten years. An abatement program offering $175 a month, or about $2,100 a year, equates to a savings of $21,000 over 10 years.
With these savings, property tax abatement programs can stimulate economic development by incentivizing property improvements and investments. By reducing or eliminating property taxes for a certain period, these programs encourage property owners to undertake redevelopment projects, construct new buildings, or renovate existing properties.
In addition, property tax abatement programs are often designed with equity in mind. Some property tax abatement programs include provisions to support affordable housing initiatives by offering tax incentives to developers who include affordable housing units in their projects. This helps address housing affordability challenges and ensures that diverse socioeconomic groups can live and work in the community.
Drawbacks
Properties often must remain owner-occupied to continue qualifying for the tax abatement. If the property is sold from one owner-occupant to another, tax abatement remains with the home. The abatement period does not start over when the property changes hands. If the seller has received seven years of abated property taxes, the new buyer only receives the remaining three years of a 10-year abatement.
Tax abatement lowers property taxes, but tax-abated properties are sometimes in less desirable neighborhoods. The tax abatement is an incentive to encourage people to redevelop and move into these areas. Whether revitalization efforts will ultimately prove successful is a risk for the buyer.
Those who live in the home past the end of the abatement period will experience a significant jump in annual housing expenses as the tax bill increases. Additionally, the city may reserve the right to end tax abatement if the homeowner becomes delinquent on property tax payments.
If a homeowner thinks their home is overvalued and paying too much in taxes, they can consider researching the assessed value of similar homes in the area.
Abatement vs. Tax Exemption
Property tax abatement involves temporarily reducing or deferring property taxes for a specified period or for a particular area. In contrast, tax exemption permanently exempts certain properties or purposes from paying property taxes altogether. Properties eligible for tax exemption may include government-owned buildings, nonprofit organizations, religious institutions, or properties used for specific purposes such as education, healthcare, or charitable activities.
Property tax abatements are usually temporary and typically last for a specified period, after which the property owner resumes paying full property taxes. In contrast, tax exemptions are permanent and continue as long as the property meets the eligibility criteria outlined in tax laws or regulations. For example, as long as the IRS recognizes a 501(c)(3) organization, non-profits will be tax-exempt.
Abatement Programs and Income Taxes
Property tax abatements structured as deferrals of property taxes may be subject to income tax. The IRS recognizes some properties or areas as a Qualified Opportunity Zone (QOZ), an economically distressed community where new investments may be eligible for preferential tax policies. Investors can take advantage of tax incentives if they invest the amount of a recognized eligible gain in a Qualified Opportunity Fund (QOF) and elect to defer the tax on that gain.
Any improvements made to a property during the abatement period may increase the assessed value of the property. Should the owner seek to sell the property after improvements are made, they may be subject to capital gains taxes based on the time the asset is held.
How Can Property Owners Reduce Property Taxes Through Abatement Programs?
Each county will have varying rules and opportunities to reduce or defer property taxes. In general, there may be programs available to seniors, people with disabilities, veterans, low-income households, or individuals with damaged property.
Are There Other Ways to Reduce Property Taxes?
If a homeowner believes they are paying too much on property taxes, they can request an assessment by hiring an independent assessor. Depending on the findings, homeowners can choose to file a tax appeal to change the value of their home.
Do Home Improvements Increase Property Taxes?
Property taxes are based on the assessed value of a home. Should the value of the home materially increase based on home improvements, the property taxes of the associated home may also increase.
The Bottom Line
The easiest way to find out if there are any property tax abatement programs in an area is to research for programs on locality websites. For large cities, a neighborhood name might be a more effective search term than a city name. Buyers may also find that real estate agents will be aware of these programs in the areas they serve.
