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421a Tax Abatement - Pros and Cons


The Cooperative and Condominium Tax Abatement Program gives partial tax relief to owners and tenant-shareholders of Residential Class 2 properties.  This is because Class 1 properties (i.e., one-, two-, and three-family homes), are assessed at a lower percentage of market value than Class 2.

The 421a benefits vary depending on factors such as location, method of construction and if requirements for affordable housing have been met.

The tax benefit (421A) bestows property tax breaks for up to 25 years on new multifamily buildings.  It was put in place in the 1970s to spur development. The idea was that developers received a tax abatement passed on to owners in new developments in exchange the developers gave back to the city by building a public space and/or affordable housing units.

Most new developments have a 10 year tax abatement. The 25 year abatement's are primarily in Harlem (empowerment zone) and upper Manhattan. Taxes are already lower there than below 96th street. Depending on the neighborhood on other variables will determine the full non abated tax burden.

The reduced RET real estate tax in most cases increases by 20% every other year. (20% every 2 years) until the 10 years is up, and at which time the property taxes will have hit their maturity.

It is important for a buyer to realize that in 11 years the taxes will be much higher than when they purchase the unit with a tax abatement.

Pros: Reduced property taxes for 10 - 25 years will make the apartment more affordable and possibly increase the sale price in the short-term.

Cons: The new higher tax amount at maturity may decrease the value of the unit. Monthly affordability is part of the equation that determines sale price. Low monthlies often garner higher sale prices and high monthly costs can lower sale price. A tax abatement may not be a good for buyers on a fixed income or who's income may decrease rather than increase over the years. 

Keep in mind the value of the apartment may increase and offset the increase in taxes. Taxes generally rise. However, in tax abated units the tax is already set at a higher amount but is being subsidized by the city for the short term (10 years in most cases)

For many buyers tax abatement's are great since they will have reduced costs for many years but they should make sure they are qualified to pay the increase at maturity or plan to sell a few years before maturity.

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