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What Is a Tax Abatement?


If you’re considering buying a new home, a tax abatement may provide an incentive that’s hard to pass up. These beneficial tax programs allow for a long-term break on your property tax bill. Savings like that will undoubtedly impact your bottom line in a positive way. However, tax abatements are only available in specific areas of certain cities, so you may need to do some digging.

Taxes can be complicated, and mistakes handling them can be costly. Consider working with a financial advisor to ensure that you make tax efficient moves with your money. 

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What Is a Tax Abatement?

A tax abatement is a property tax incentive government entities issue that will reduce or eliminate taxes on real estate in a specific area. Abatements can last anywhere from just a few months to multiple years at a time. Low- to middle-income residents are usually the target demographic for these programs. Although towns and cities typically offer abatements the most, there are state and federal government programs as well.

If you buy a home that is already eligible for a property tax abatement, you’ll be able to reap the benefits immediately. Your property tax bill will be lower, or waived entirely, for the duration of the abatement period. Issuing entities do have the right to revoke the abatement, though.

Am I Eligible for a Tax Abatement?

Tax Abatement

There’s no definitive answer as to when and if you’ll be eligible for tax abatement. This is because eligibility requirements vary wildly from municipality to municipality and state to state. To gain approval, many government entities will likely ask you to submit an abatement application. There are a number of factors you can look out for, though, to determine if you’ll fit into the guidelines for an abatement.

Most importantly, many tax abatements come with income stipulations for new homeowners. In general, these programs are meant for low- to middle-income individuals and families whom property taxes might significantly affect. If you earn too much, a tax abatement might be outside of your reach.

In some cities, you may have to work for your tax abatement. You might have to renovate or make environmental improvements to the property before applying for a property tax abatement. This lengthy process can be a headache, so make sure you have enough money to cover the unabated property taxes in the meantime.

Tax abatements often call for new residents to move into eligible homes during an exact period of time. This could be a major problem for anyone looking to move into a new place before or after these predecided windows.

Issues with Tax Abatements

Tax abatement program can incentivize individuals and families to move into less desirable communities. So despite the perks of abatements, you may not be thrilled with where you must relocate to get them. Some things to consider include crime rates and school quality.

Because tax abatements are temporary, eligible homeowners will need to prepare for when they run out. When the time comes, the rise in your bills could be a shock, so talking to a financial advisor might be a worthwhile investment.

Unfortunately, sometimes you can only claim an abatement on the value you added to property by making renovations, not on the entire value of the house. In other words, you would pay property taxes on the value of the home before you made additions or renovations. Then you would get a tax break on the rest.

Why Cities Offer Tax Abatements

Tax Abatement

In many cases, offering a property tax abatement is part of an effort to revitalize a city or a neighborhood. These programs – for landlords and regular homeowners alike – can serve as an incentive for new construction and renovation. These improvements to local properties can attract new residents and businesses to an area. When the abatement runs out, the property tax base may be larger. That could lead to an increase in property tax revenue in the long run.

Some cities or states offer property tax abatements as an incentive for historic preservation. Someone who is willing to buy a historic property and remodel it or expand it rather than tear it down may qualify for a tax break. If you’ve always dreamed of renovating a historic home, you may want to do some research to find areas that would offer you a tax break for your efforts.

Bottom Line

A property tax abatement could be enough to sell you on a given home. You may be deciding between two properties you like. If one comes with a tax abatement, that’s a plus that can increase the house’s appealing. Before you buy, however, it’s a good idea to consult local records to see what the property tax payments would be without the abatement.

Then, you’ll want to make sure you budget for the property tax increase so you’re not caught off guard when the abatement ends. For expensive properties in markets like New York City, your property tax bill could rise significantly when an abatement ends. But like most financial situations, planning is key.

Tips for Tax Management

  • A financial advisor can offer great insights into how taxes can affect your current and future financial situations. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors who serve your area. You can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • One of the best ways to plan ahead for your taxes is to figure out exactly how much you’ll use per paycheck. This can be a difficult thing to do, though. Step in the SmartAsset income tax calculator. To use the tool. you just need to input your annual household income, your location and your IRS filing status. You can even customize the calculations further by adding in your 401(k) and IRA contributions, itemized deductions and personal exemptions.

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