Most residential and commercial property buyers are always on the lookout for programs that can ease their financial burden. One such program is tax abatement. This tax program offers buyers an incentive that’s hard to resist. It allows them to enjoy reduced property taxes or long-term breaks on their property tax bill. Either way, they get to save money, which undoubtedly impacts their bottom line, but in a positive way.
However, this program is only offered by specific states and cities, so it’s wise to do some research. With that out of the way, let’s learn more about tax abatement - what it is, how it works, and its benefits.
What Is a Tax Abatement?
A tax abatement is a subsidy that reduces or eliminates the amount of taxes individuals or businesses have to pay on a property. Besides tax reduction, tax abatement might take the form of a tax rebate or a decrease in penalties. It’s usually issued by entities that levy taxes on property owners, including.
State treasury offices
State and local governments
A tax abatement can last anywhere between 6 months to 10 years. But in some rare cases, individuals or businesses can enjoy abatements indefinitely. These tax programs often target low to middle-income earners.
Tax abatement programs work to attract revenue to areas within a state, county, or city that require an influx of urban renewal. They boost revitalization efforts in the areas by bringing in new businesses, improving local infrastructure, and creating jobs. Plus, they improve the value, appearance, and integrity of deteriorated neighborhoods.
Besides that, tax abatement helps to retain city residents by ensuring they don’t have to pay higher taxes as they improve their homes. It encourages builders to seek new developments or tear down old buildings for new ones to attract new residents. Also, it rewards buyers for taking the risk of repairing and improving distressed properties while revitalizing the community.
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Irrespective of the reason a city or state is offering an abatement, buyers can enjoy several benefits. For example, the tax program allows buyers to find great deals on properties that they might not have been able to afford otherwise. The program also lets them save significant amounts of money on property taxes.
If you’re interested in buying a piece of property but wish to save on taxes, consult your real estate agent to find residential properties and commercial buildings offered with tax abatements attached.
How Tax Abatement Works?
Every property - whether commercial or residential - has a market value in the eyes of the county, state, or city auditor who assesses property taxes. The auditor determines the property tax based on its value and location.
So, if you purchase a house for $275,000, you might end up paying an annual tax of $8,000. However, if you buy a newly constructed or recently renovated house for $275,000 that comes with a tax abatement of $275,000, the property’s market value will reduce to zero.
Because of the equal amount of abatement, the entity issuing the property tax will not charge you taxes at the end of the year. But keep in mind that the abatement will not eliminate the property tax bill. You might still have to pay property taxes on the value of the house before improvements. Nevertheless, you will get to save a substantial amount of money.
As said earlier, the government uses this taxation strategy to encourage new investment and attract buyers to a specific location with lower demand, like blighted neighborhoods amid revitalization efforts.
While some cities allow you to buy properties that already have an abatement, in some, you might need to work for your tax break. The city will require you to buy the property and make some improvements before applying for the abatement. Most buyers opt for the former option since it seems easier, and they don't have to deal with all the headaches that come with home renovations.
Eligibility for Tax Abatements
Eligibility requirements for tax abatements tend to vary depending on the municipality, city, or state. Most government entities will require you to apply for abatement by filling out and submitting a form. To get approved, there are several factors these entities will consider, including your income, type of incentive offered, and target for the abatements.
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Most major tax abatement programs are offered to low-to-middle-income individuals and families who might struggle to pay the high property tax. However, if you earn more than the stipulated income for tax abatement, you might not qualify for the program.
In some states and cities, you can purchase properties with tax abatements already attached. But in others, you might need to buy the property first, then apply for the abatement. You will only be eligible for the tax abatement if you make certain improvements to the home or commercial building. If you fail to upgrade the property, the abatement offer will be withdrawn, and you will pay the full value of the property taxes.
Some tax abatement programs might require beneficiaries of the program to renew their applications and eligibility regularly. Others will need the buyers to move into the abated homes within the stipulated time frame. Otherwise, the entities offering the tax abatement might rescind the tax incentive on the property. As a result, you will need to settle the complete property tax bill at the end of the year.
Before buying an abated property, consult an accounting professional for example a CPA or bookkeeping expert to review specific tax abatement information omitted, like the dollar amount of foregone tax revenues and other commitments made besides reducing taxes.
Benefits of Tax Abatements
Tax abatements come with many benefits, not only for individuals and businesses interested in properties but also for the community and government.
For individuals and businesses, tax abatements allow them to find great deals on homes and commercial buildings that they otherwise cannot afford due to high property taxes and rent expenses. And because of the reduced property taxes, they get to save significant amounts of cash. What’s even better, tax abatements remain with the property, meaning you can pass the tax expenditures to the next owner. As such, you will help the buyer save money and enjoy higher resale value for your property.
The tax programs also benefit the community. A municipal or a city can give companies and businesses a tax break in return for investments like new retail locations, factories, warehouses, etc. Such establishments will increase job opportunities in the area, therefore improving the overall quality of life of the residents. New developments in a city also mean a large tax base and a robust economy, which will support additional business opportunities.
In addition, tax abatement reduces the costs for start-up or business expansion, especially in deteriorated areas. It also creates a positive relationship between businesses/companies and the community, creating a sense of being wanted and appreciated.
Already established businesses in the local neighborhoods also benefit when new businesses open. They see the increase in patrons, and it forces them to invest more capital into improvement and hire additional employees.
Finally, tax abatements offer a flexible development tool. Normally, infrastructure renovations or risky building ventures are costly. Without the tax breaks, it’s financially unfeasible for companies to make such investments in certain areas.
Potential Drawbacks of Tax Abatements
Despite the perks offered by tax abatements, buyers need to exercise some precautions before getting into an agreement.
It’s wise to research the areas where you are looking to buy the abated property, especially when individual tax abatement agreements entered. Most times, this tax break applies to properties in neighborhoods with high crime rates and low school quality. And if the revitalization efforts prove unsuccessful after the sale, your property value could remain the same or even fall. As a result, there’s no guarantee you will make money when reselling it.
Buyers should also know the tax abatement disclosures and their duration. Most governments determine the tax abatement period based on individual cases. So, if you continue living in a property past the abatement timeline, your annual housing expenses will increase significantly. If you’re not prepared for the increase, you might have a hard time paying the higher property taxes.
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Another thing, entities that offer tax abatement can easily withdraw the offer if the owners cannot meet certain conditions. For instance, if the owner does not pay taxes on time, the abatement on the property will get revoked. Because of this, it’s vital to make timely property tax payments.
A tax abatement presents you with the best way to save money and invest in appealing and lucrative properties. However, before proceeding with the purchase, make sure you are eligible for this tax program. Also, ensure you are comfortable with the neighborhood where the property is located.
It’s wise to go through local records to determine what the property tax payment would be without the tax break. Ensure you set aside a budget for tax bill increases to avoid being caught off guard when the tax abatement timeline ends. And if you purchase the property, be mindful of tax payment deadlines and also be sure to adhere to the principles of Generally Accepted Accounting Principles.
Hopefully, this was useful and answered any questions you may have on tax abatement. We are available to answer any additional questions you may have and look forward to hearing from you soon.
Final Thoughts from the Hall Accounting Team
If you have an effective tax plan, you offset your tax burden and boost your tax efficiency. Other benefits include reducing healthcare expenses or offering your retirement with contributions.
However, you can only develop a strong tax planning strategy when you start early, not when the year ends. Keep in mind creating a tax plan early will help you save more on your annual income tax.
Monthly tax planning services are a fantastic tool to do this. At Hall Accounting, we have had tremendous success with our monthly clients. Schedule a call today to learn more about this service, and see if it is a good fit for you and your business.