Many newer condo buildings like those in Long Island City received abatements that kept their property taxes low. But as those exemptions phase out, monthly tax bills are rising sharply. (Getty Images)
As millions of New Yorkers file their 2018 taxes, many are feeling the pinch of a reduced ability to deduct property taxes from their income. But while these limited state and local tax deductions have gotten lots of attention, they’re not the only tax issue weighing down the NYC home sales market.
Less discussed but equally serious is the fact that many tax abatements on recently built NYC condos are beginning to expire — sometimes tripling the monthly tax bill for their owners, and making them far less attractive to prospective buyers.
Of the 12,000 NYC condos that sold in 2010 alone, 1 in 3 benefited from an exemption that lowered their tax bills[1]. And tax bills on nearly two thirds of those units with exemptions have risen since then, as the exemptions begin to phase out. Nearly 15 percent of the condos sold in 2010 have since had their monthly taxes at least double, while monthly taxes on 10 percent have tripled. For nearly 1,000 of these condos, property taxes have increased by more than $1,000 per month.
These increases can severely impact selling prices. Of all condos bought since the start of 2010 and resold in 2018, sellers received a median annual return of 5.8 percent. For the 130 of these units that resold with tax increases of more than $1,000 per month, the median annual gain for the seller was just 2.3 percent.
There are plenty more of these units on the market: 190 condos listed on StreetEasy as of April 1 had taxes at least $1,000 per month higher than the last time they were purchased. They’re a vivid reminder to buyers eyeing condos with tax abatements that what can look like a great deal now may look very different in two, five, or ten years, as the discounts expire.
Exemptions Phasing Out
Over the past 20 years, the city granted 421-a or J-51 tax abatements to many prominent new condo developments. The abatements allowed owners of these developments to pay lower property taxes in exchange for the construction of below-market, affordable units distributed through the city’s housing lottery system.
But these abatements were structured to phase out over 10 to 35 years. And now, with the city’s pre- and post-recession building booms fading into the past, and the abatements ending, tax bills on many condo units are rising far faster than they would from higher home values alone.
Rising Monthly Carrying Costs
More than a third the 90,000 condos sold between 2010 and today benefited from some type of exemption. These units enjoyed an effective annual tax rate upon closing of just 0.3 percent of their purchase price, a third of the 0.9 percent levied on homes without exemptions.
Without abatements, however, the tax rates on those homes rise to more than 1 percent of the original purchase price — nearly triple their original rate. In dollar terms, the median monthly tax bill with exemptions is $135; without them, it’s $713.
While these numbers may seem minor as a share of overall expenditures — the median sale price of a condo sold during the period was $779,000 — an additional $500 or so per month adds significantly to a home’s monthly carrying costs. Many new condo developments rely on selling to investors, who buy the units and place them on the rental market, hoping they’ll appreciate in the long-term. For these owners, holding the unit becomes increasingly onerous when its tax bill rapidly rises.
2000-era Buildings Feel the Pain
Buildings completed just before the financial crisis are among those now feeling the greatest pain from higher property taxes. More than 100 of the units in both the Orion in Midtown (built in 2007) and the Rushmore in Hell’s Kitchen (built in 2006) sold since 2010 have had their property taxes triple.
With taxes rising, owners in both buildings are looking to sell. As of early April, the Orion had 25 units on the market, while the Rushmore had 16. And some of these units are selling: This 3-bedroom in the Rushmore sold for $3.5 million in January 2019, despite a monthly tax bill of more than $2,500. The seller, however, appeared realistic about the effect of the tax burden on the unit, agreeing to a closing price just $20,000 above what the unit was purchased for in 2009, when the monthly tax bill was less than $100.
In many cases, higher taxes have complicated an already difficult sales pitch for many condos. This 3-bedroom in the West 42nd Street condo tower the Atelier sold for $1.3 million in 2010, when the monthly taxes were $32. In 2016, the owners relisted the home at a whopping $6.5 million. Meanwhile, its taxes crept up to $1,500 a month. The unit has yet to find a buyer.
Expiring Abatements Compound Other Tax Issues
With recorded sales slowing substantially over the past year, higher tax bills — especially in units with expiring abatements — are compounding issues surrounding the erosion of state and local income tax deductions. (The recent passage of a more progressive mansion tax and higher transfer taxes is a factor, too.) With inventory rising, and new developments still arriving on the market, sellers can face harsh realities when pricing their units for resale. Those unwilling to account for the impact of rising property taxes could be in for a painful surprise.
How We Did It
StreetEasy collected public records on assessed taxable value, tax exemptions, tax rates, and sales from the New York City’s Department of Finance and Department of Buildings, and merged that data with listing and building data from StreetEasy.
[1] Excludes buildings with payments in lieu of taxes, including those in Battery Park City and Roosevelt Island.
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