Tax Abatement Explained
Tax Abatement Explained
Tax breaks like tax credits and tax deductions are offered by the IRS to encourage taxpayers to make investments that stimulate the economy, and property tax abatements are no different.
If you are planning to purchase real estate and want to take advantage of a tax break that could reduce your tax liability, searching for a tax abatement program in your area might be the way to go.
TABLE OF CONTENTS
Key Takeaways:
- Tax abatement is an exemption or reduction on the level an individual or business is taxed with the goal of incentivizing specific behavior, such as purchasing real estate in a lower-income area to boost the local economy.
- Tax abatements can be created by local, state, and federal governments, and depending on the specific situation, the duration can last from a few months to a few years.
- The qualifications for an individual or business to take advantage of property tax abatements depend on the specific situation but can be based on factors such as the potential homebuyer’s income, the type of improvements that must be made on the building, the owner living in the building, or the preservation of historic homes.
- Some of the drawbacks related to property tax abatement programs include the requirement to move to areas with potentially higher crime rates or worse schools, the fact that after the abatement period ends property taxes will spike, or that there can be strict restrictions to the abatement.
Tax Abatement Meaning
Tax abatement describes the reduction or exemption on the level an individual or company is taxed to incentivize specific behavior. The purpose of this taxation strategy is for governments to encourage specific taxpayer activities, such as investing in real estate in a specific area to revitalize those locations with new homes or businesses.
When people talk about tax abatement, they are usually referring to a reduction in taxation in relation to property taxes. These tax abatement programs work by providing long-term breaks on a taxpayer’s property tax bill if they invest in real estate in specific locations.
Purchasing a home that is eligible for a property tax abatement allows taxpayers to enjoy the benefits of a lowered or completely waived property tax bill during the designated abatement period, allowing them to save money on tax payments.
How Long Do Tax Abatements Last?
Tax abatements vary in length of time, depending on the city, state, or federal government appointing the abatement. Some tax abatements are offered for only a few months, while some can last for as long as several years.
Why Are Property Tax Abatements Created?
Local, state, and federal governments can create tax abatements with varying time durations, restrictions, and requirements with the goal of improving a specific area. By establishing tax abatement programs that lower what individuals and businesses are required to pay in property taxes, governments can incentivize the growth of the local economy as new construction is built, existing buildings are improved, new residents move to the area, and jobs are created.
Even though tax abatement programs result in homebuyers paying less money to the government in tax revenue, these programs are still favorable as a revitalization effort because the loss in tax payments is often offset by the economic growth caused by the improvements of an area.
Qualifications For Tax Abatement
There are different qualifications for tax abatements depending on the situation and the municipality where people are purchasing real estate. Some of these qualifications are related to the buyer and others are dependent on the development requirements once the house has been purchased.
While the requirements can vary significantly depending on the specific situation, here are some of the potential qualifications for property tax abatements:
Income
Some tax abatement programs have a maximum income limit for aspiring property owners. It is common for tax abatement programs to specifically target low- to middle-income earners.
In this situation, buyers who make an income below the set threshold will be the only people eligible to take advantage of this tax incentive.
Improvements
Another example of a restriction set by property tax abatement programs is to require that the individual or business purchasing a building in this neighborhood must make certain improvements to the building or revitalization efforts.
These could be general renovations or improvements that impact the environment, and usually, the tax abatement cannot be claimed until after the renovations have been made.
Owner Residency
It is possible that property tax abatement programs will include the restriction that the homebuyer must live in the house during a specific time period, which may conflict with their investment plans.
Historic Preservation
Cities with historic areas sometimes offer property abatement programs to incentivize someone to purchase a historic building with the intention of renovating it instead of tearing it down.
Older homes often carry a variety of underlying issues that can result in higher costs to fix the buildings, so property abatements for historic preservation is a strategic way a city will encourage the retention of the history of a location.
Drawbacks Of Tax Abatements
While the benefit of saving money on property taxes is desirable for aspiring homeowners, there are some potential issues that they should consider before buying into a tax abatement program.
Qualifying Areas
As tax abatement programs often provide incentives for people to purchase properties in certain neighborhoods or areas, this may result in the homebuyer needing to move to an area with crime rates and school systems that are not as developed as they may prefer.
Temporary Abatement
Another important factor to consider is that property tax abatements are temporary, so after the abatement period is over, the taxpayer will be responsible for taking on the additional property tax payments that they were not used to previously paying for.
While this may not be a dealbreaker, individuals should prepare for the increase in their tax bill by learning when the abatement period ends, investigating how much their tax bill will increase following the end of the abatement period, and creating a budget plan so they can afford the additional payments.
Abatement Restrictions
Understanding the terms of a property tax abatement is an additional aspect to consider when considering a real estate investment with a property tax abatement. For example, some abatements are only able to be claimed for the property value added when taxpayers do renovations.
During this circumstance, taxpayers will be responsible for paying taxes on the initial value of the property upon purchase, but they will be exempt from the taxes on the added home value. As long as taxpayers do their research into tax abatement guidelines before purchasing a property, they will likely be content with the tax savings generated from this investment.
How To Find Property Tax Abatement Programs
There are several sources people can utilize to find out if there are any property tax abatement programs in their area to take advantage of.
Internet
A simple Google search for “property tax abatement” with the name of the desired county, city, or neighborhood is a great strategy to find out if there are opportunities to save money when purchasing a property. Including the keywords “real estate listings” may be beneficial additional words to include when searching the Internet for tax abatement programs.
Real Estate Agents
Contacting an experienced real estate agent is another strategy to find tax abatement programs suitable to their purchasing goals. These professionals can be significantly helpful in navigating property listings, mortgage rates, and loan applications, so this could be the best approach for people in the midst of looking for affordable housing options.
Tips For Property Tax Abatements
People who are in the market for property tax abatements when searching for real estate to purchase can avoid potential issues if they take the right approach. Here are some tips to consider:
Research
It is important to conduct research when considering purchasing a property with tax abatements so you are aware of any guidelines and restrictions in addition to any potential drawbacks from investing in that area.
While real estate is usually a reliable investment, property tax abatements are usually offered in locations with lower property values, and even after renovations, there are no guarantees that the value of the property will increase. Real estate agents and developers in the area may have insight into the growth of the area, so asking around or using resources like the Internet is a good course of action before jumping into a sale.
Timelines
Tax abatements will not last forever, so to avoid the cost of property taxes suddenly spiking before you have time to gather additional funds for the payment, it is important that you are aware of the tax abatement timeline and make preparations for when it is over.
Payments
Even though some tax abatement options provide homebuyers with exemption from property taxes, usually there are still some taxes that will be owed to the IRS. For this reason, it is essential that you are aware of IRS tax payment deadlines to avoid fees, penalties, or potentially having the tax abatement revoked.
If you are preparing to purchase real estate and are wondering how tax abatements could apply to your situation, hiring an experienced tax professional can help you take advantage of tax incentives that overall save you money on your tax bill.
Need tax help? Schedule a free consultation with Ideal Tax today!
