What is a tax abatement?
If you’re in the process of purchasing a property, you may have heard the term “tax abatement” in relation to real estate. Tax abatements are programs where the government provides incentives that reduce or eliminate property taxes on specific areas for real estate. An abatement can last for months or years and generally is targeted to low- and middle-income properties. Abatement programs are most often issued by local towns and cities but there are also abatement programs issued by state and federal government bodies as well.
Tax abatements exist outside of real estate as well, and governments may offer an abatement as an incentive to reduce taxes for various other programs. A local or state government, for example, may offer a tax break to a business in an effort to encourage industrial growth and increase the number of jobs available within a community. Businesses may be offered tax abatements to open a business in certain areas of a community to promote business growth and boost the local economy. Non-profits may be offered tax breaks in the form of abatements in order to reduce their operating costs and benefit the community in which they serve.
What is a property tax abatement?
Sometimes the government offers programs to reduce the amount of property tax due on a property, and this is known as property tax abatement. These programs vary widely depending on the location and region in which they are offered, and the terms of the program may last from months to years. The abatement program may or may not have an income restriction, but the property itself does have to be located within a specified zone in order to participate.
When purchasing a property, it may already have a tax abatement in place. You may also be able to apply for an abatement if you make improvements or updates to the property, depending on the area and programs available to you.
During the abatement period, you’ll need to remain in your home and continue to live there – you can’t rent it out. If you decide to sell your home during the abatement period, that tax abatement will transfer to the new owner, which can be an incentive for the buyer.
How can you find a property with a tax abatement?
If you’re looking to purchase a property that is eligible for tax abatement, search for your city or town and “property tax abatement”. Working with a realtor may be useful as they often are aware of abatement programs in the area around where you live. You can also browse your local government website to see if they list current abatement programs.
What you need to know about tax abatements
While a tax abatement does give you a break on your taxes, there are certain things you should know before you get into it. With a property tax abatement, the adjusted amount of property tax may change over time, and it will definitely increase once the abatement period has ended. Plan ahead for when the abatement period ends so that you are budgeting for the change in property taxes that are due and be aware if you plan on selling that the increased property tax may make your home less desirable. Working with a financial planner can help you plan ahead for large changes to your budget.
If you fail to make payments on your property tax during the abatement period, the locality in charge of the program may terminate the abatement. This is important to note because often your mortgage company is the one that is paying the property tax, so you should double-check that they are paying the tax each month so that you aren’t falling behind without knowing.
If you’ve entered into an abatement that was contingent on making improvements to the home, things can get tricky as the tax break may only apply to the value that you’ve added to the property and not to the entire property value. This is something to be aware of when planning for your finances.
Utilizing both a financial planner and tax specialist in addition to a real estate agent can help you make informed decisions when it comes to tax abatements. At Diversified Tax, we have access to all three in one place, and we’re here to help.