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What is a 421a Tax Abatement?

Whether you rent or own a home in New York City, you have undoubtedly heard the term “tax abatement.”

Under this umbrella term are different types of tax programs, such as the “421-a tax abatement,” the “J-51 tax abatement” and simply, “tax exemption.”

Types of abatements and exemptions

Here’s a rundown of the basic terms.

  • A tax abatement for a condo or co-op is the reduction in the property taxes for the home for a set period of time by way of a credit being applied to the amount of taxes owed.
  • A tax exemption lowers the amount of tax you owe by reducing your condo or co-op’s assessed value.
  • Tax abatements and exemptions have been granted to developers by the city to promote real estate, community and industrial development.
  • Property taxes for units in a tax-abated building are minimal for a couple of years of the abatement. The taxes inch up each year afterward, and by the end of the abatement’s period, owners find themselves paying the same property taxes as everyone else.

421a

The 421a tax abatement is the tax term you are most likely to come across during your NYC home search.

The 421a tax exemption program was started in 1971 and encourages the development of underutilized or unused land by drastically reducing property taxes for a set amount of time. Thousands of Manhattan condos were built under this program prior to the 2008 housing crash.

The exemption usually lasts for 10 years but can be for 15 or 25 years in some boroughs and upper Manhattan, areas still in development. The exemption gives unit owners a 100 percent exemption from any increases in their property taxes 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.

For example, if you bought an apartment in a tax abatement building in the first year and sold it in the seventh year, the buyer would have the remaining three years of reduced taxes since the abatement stays with the property, not with the owner.

J-51

The J-51 property tax exemption is granted to residential buildings — usually rent regulated — for renovations that are planned. Essentially, the J-51 property tax exemption “… effectively freezes a building’s assessed value for tax purposes, so the owner does not have to pay property tax on the increase in value resulting from the rehabilitation work.”

The Cooperative and Condominium Tax Abatement Program is another tax relief program your condo or co-op may qualify for, but only if it is your primary residence. There are several other requirements your home would have to meet in order to be eligible for this program, and the recent changes to it are being debated.

What to consider despite the tax relief

Sure you want lower taxes, but here are factors to consider before you decide to buy a condo or co-op just because the tax relief seems to sweeten the deal.

  • First, what are the scenarios under which those tax exemptions can fall off or change? Do your research and ask questions of your broker about what new laws or regulation changes could impact dwellings covered by 421a, J-51 and the Coop/Condo Tax Abatement. Think long term, or at least 3 to 5 years out.
  • Does the cost of the pricey new condo merit the tax exemption? You may want to consider whether or not the tax abatement is worth it if you are actually paying a premium for the unit, especially in new construction, which can be carry the highest price-per-square-foot charges in the city.
  • What will your real costs be when the abatement drops off? The property tax may be dramatically higher than the time of purchase. Many owners who have enjoyed the benefits of a tax relief for a few years may feel rather surprised (not pleasantly) when they pay their tax bills in the later years of the abatement and afterward.
  • The land under your building is not part of the deal. Is that something to consider? Yes. For example, while the building may be exempt from the normal tax rate under the 421a program, the land is not. Thus, the city can raise the assessment on the land in order to acquire tax revenue.
  • Are your tax-abatement savings offset by higher common charges or maintenance fees? Check to see how often and how much these fees have been raised or decreased over the last several years. You can then get a fuller picture of whether or not the property tax abatement will truly offset other costs and save you dollars in the medium to long term.
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