How Does Tax Abatement Work?


property tax abatement

Buying a piece of property is a decision that most residential and commercial buyers do not take lightly. They want to make sure they will get their money’s worth out of the property in which they invest. 

They also want to take advantage of programs that will ease the financial burden that comes with buying real estate. For many buyers, this opportunity comes with the availability of tax abatements. 


What is a Tax Abatement? 

A tax abatement is a financial incentive that eliminates or significantly reduces the amount of taxes that an owner pays on a piece of residential or commercial property. It is offered by entities that impose taxes on property owners. These entities can include: 

  • Municipalities
  • City governments
  • State treasury offices
  • The federal government

A tax abatement can be temporary and only last for a few months to a year. In other instances, it can endure for decades in or in rarer cases indefinitely. The program also may be geared toward specific property buyers such as those who are lower to middle income earners. 

Some taxation entities offer tax abatement programs as part of revitalization efforts for a specific area within a city, county, or state. The programs are designed to bring in buyers to the specified area and to boost the appearance, value, and integrity of a blighted neighborhood. 

Regardless of the reason for why the abatement is offered, it can be an opportunity for buyers to buy property and save money on the taxes they otherwise would be expected to pay on the building or land. Before they purchase a piece of property, prospective buyers who are interested in this type of program should ask their real estate agent about houses, commercial buildings, or other real estate that comes with tax abatements attached to them. 

The Purposes of Tax Abatements 

Tax abatements are offered to buyers for a number of reasons. The foremost reason behind most abatements is to offer a financial incentive to people to buy property and move into a specific area of the city, county, or state. 

The tax abatement is designed to make these areas more appealing to prospective buyers and developers. It also obligates these individuals to live or do business in the neighborhood in order to receive the full advantages that come with the tax abatement offer. 

Tax abatements are also designed to stimulate the local economy with the construction of new homes and businesses in the area. Homes that already exist are often sold with tax abatements offered on them. The buyers then are responsible for renovating and improving the buildings in order to receive the property tax abatement on them. 

Some types of tax abatements likewise are created to encourage the building or remodeling of buildings into energy efficient pieces of property. Owners are responsible for adding environmentally friendly elements to their buildings. As long as they install solar panels, use eco-friendly materials, and make other energy efficient improvements to the homes or businesses, they will receive an abatement of their property taxes. 

Finally, tax abatements are designed to improve neighborhoods and increase the value of properties that would otherwise sit vacant or remain blighted for years. Once the improvements are made and the abatements expire, the properties then have higher appraisal values, allowing them to be taxed at a higher rate


Eligibility for Tax Abatements 

Qualifying for a tax abatement depends on a number of factors including the type of incentive being offered as well as the intended target for this money-saving opportunity. While some properties are listed for sale with the tax abatements already attached to them, other programs require buyers to apply and be approved for the abatements. Further, some programs require participants in the tax abatement to renew their applications and eligibility on a regular basis. 

For example, a person who wants to buy a home with an attached tax abatement may be required to make less than a certain amount of money each year. If the prospective buyer earns an income over the stipulated guidelines of the abatement offer, he or she will not be eligible for it. 

Likewise, if a person buys a commercial building in a neighborhood where tax abatements are available, he or she may have a certain time frame to make improvements to the building. If the person fails to upgrade the building, he or she will have the abatement offer rescinded and thus be responsible for paying the full value of the property’s tax. 

Finally, some programs require owners to take possession and move into tax abated properties within a set time frame. Failing to do so would result in the tax abatement being removed from the property. The owner would then have to pay the full amount of the property’s taxes. 

Prospective buyers are required to be informed of the eligibility for tax abatements prior to closing on the properties. They can then determine if they will meet these qualifications before putting money down on a home or commercial building. 

Precautions with Tax Abatements

While a tax abatement may initially seem like a good deal of which to take advantage, it does require buyers to use some precaution before agreeing to it. To start, people who are interested in tax abatements may do well to realize that these programs are typically offered on buildings or homes that are located in less than ideal neighborhoods. 

Crime rates in these parts of a city or county may be higher than in other locations. Likewise, property values may be much lower than elsewhere in the area. Even with a tax abatement, there is no guarantee that the appraisal value of the property will increase during the time that the owner lives or does business on it. 

Second, owners of tax abated properties are encouraged to prepare for the eventual expiration of the abatement. If the abatement has a finite timeline, the owner of the property should be ready at the end of the abatement’s term to pay for higher property taxes. This increase in taxes could take a significant toll on the owner’s budget. 

Finally, owners of tax abated properties are reminded that the abatement can be rescinded by the entity that is offering it to them. For example, if the owner of a property becomes delinquent with his or her property tax payments, the owner may have the tax abatement revoked on the property. As such, owners are encouraged to make their payments in a timely manner and to check their monthly mortgage statements if their mortgage company pays their property taxes for them. 

A tax abatement can save buyers money and make properties more appealing and lucrative in which to invest. Prospective buyers who are interested in tax abatements can buy properties with these programs attached to them. They can also apply for tax abatements at the offices of agencies it that impose taxes on property owners.

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