NYC Living

Are Tax-Abated Apartments Worthwhile for NYC Buyers?

If you are trying to buy an apartment in New York City, should you seriously consider apartments for sale with a tax abatement?

First of all, what are tax-abated apartments?  Sometimes (incorrectly) called tax exempt apartments, these are units that give buyers and owners a huge break on property taxes. It usually starts off with a 100 percent exemption from any property tax increases for the first two years and then taxes are increased by 20 percent of the normal tax rate every two years for the remaining eight years. Some abatements last 10 years, but some can be for 15 or 25 years.

Pros and cons of abatements

With this in mind, should buyers concentrate on finding and buying a tax-abated apartment?

As an agent representing both buyers and sellers, Alison Rogers see both the pros and the cons of tax-abated properties.

“Abated taxes can provide quite a significant savings and many buyers need the savings delivered by the abatement in order to purchase.”

For example, Rogers has a listing in Harlem for a two-bedroom, two-bathroom bath condo for $795K in which the monthly taxes are $20 a month, or about $240 a year and compares it to another listing — an unabated condo studio in Midtown for $750K, in which taxes are $600/month, or about $7,000 a year — quite a difference in savings and affordability.

But, while tax-abated apartments can offer huge monthly savings, it is a double-edge sword for two reasons: condo prices with the tax abatement are usually priced higher and once the abatement expires, the cost of taxes can be prohibitive.

“Abatements simply push up the prices developers can charge, so in that sense they’re not saving purchasers any money; they’re enriching developers,” said Rogers.

Apples-to-apples comparison

In certain neighborhoods with high densities of new developments, buyers can expect to find many condos offering tax abatements. For example, many real estate developers in West Harlem received tax abatements, such as the 421a, when they were proposing and constructing new properties. As a result, a condo buyer in West Harlem can generally expect to see 25-year abatements at competing properties.

From an agent’s perspective, Rogers often focuses on the prices at competing buildings that do not have abatements. She then will adjust the prices on her abated properties because, as she has found “… comparing Building A with an abatement to Building B without an abatement is not an apples-to-apples comparison.”

But the real gotcha for buyers is that when the abatements mature and ultimately expire, the tax increases can be daunting.

“A buyer doesn’t so much see them as ‘icing on the cake,’ but as a poison pill to be avoided, because the seemingly affordable apartment might be unaffordable in five years,” said Rogers.

> See listings with tax abatements that expire in 10 or more years

 

Diane Tuman

Diane is Editor-in-Chief at StreetEasy. She was a newspaper editor for more than 15 years (Albany NY Times Union, Seattle Post-Intelligencer) before moving into the dotcom world (Microsoft, Amazon, Expedia, Zillow). She joined Zillow in 2005 and moved to New York to join StreetEasy in 2014.

  • Tom Rinaldi

    It’s just like buying in a low interest rate environment. You are enriching the seller and accepting a headwind to your own appreciation potential.

    • Well put, Tom. I know people who are frantically trying to unload their tax abated apartments before the market rate kicks in. It will be interesting to see how long they sit.

      • Tom Rinaldi

        I usually look at cash on cash return, excluding abatements. Maybe I am wrong but they generally seem ridiculously low. In a market like this, the brokers dont know offhand what the taxes would be without an abatement but they will look it up in the offering plan.

        I have a question. Maybe you know the answer. Some of the taxes out there seem to be not only abated, but the level the taxes would be at without abatement seem unnaturally low. For instance a $1.4mm unit in DUMBO with $30 a month in taxes and the broker says without the abatement in place, the taxes would be $360 a month. I am guessing that such a unit is at risk for a reassessment by the city, later. $360 a month seems like 1/3rd or 1/4th of what you would expect for a unit of that market value.

        • That seems awfully low. I’ll ask our analysts here to see if they know.

          • Tom Rinaldi

            Look at condos in DUMBO with taxes under $100 a month. Some seem like good cash yields even when finding out the true unabated taxes, but something tells me the unabated taxes still reflect a big discount to a full assessment from the city, and as such at risk to a new building valuation if you see what I mean.

          • Tom Rinaldi

            I am actually speaking about this unit specifically..

            http://streeteasy.com/building/the-beacon-tower/8d

      • Tom Rinaldi

        And to tie the two piece of the conversation together, people who bought condos in Manhattan with abatements say in the 2005 time frame had decent returns over the last ten years… But I would make the argument that they were bailed out by falling interest rates. If you look at the appreciation and adjust it for interest rate…it doesn’t look that great at all.

  • native new yorker

    NYC did something similar in the mid 1980s with private homes on Staten Island.