What Is Abatement? How It Works With Taxation, and Examples

What Is an Abatement?

An abatement is a reduction or an exemption on the level of taxation faced by an individual or company. Examples of an abatement include a tax decrease, a reduction in penalties, or a rebate. If an individual or business overpays their taxes or receives a tax bill that is too high, it can request an abatement from the tax authorities.

Key Takeaways

  • An abatement is a tax break offered by a state or municipality on certain types of real estate or business opportunities.
  • A real estate tax abatement may reduce a home's property taxes for a period of time, or may grant tax breaks to businesses.
  • The purpose of an abatement is to encourage development or economic activity within a city or community.
  • Governments may also offer abatements to prevent industries with high employment from leaving the community.
  • Most abatements expire after a predetermined number of years, at which point taxes return to their ordinary level.

How Abatements Work

Abatement is a taxation strategy usually used by various governments to encourage specific activities, such as investments in capital equipment. A tax incentive, for example, is a type of tax abatement.

Abatements are often utilized in real estate. Some cities have property tax abatement programs that eliminate or significantly reduce property tax payments on a home for years or even decades. The purpose of these programs is to attract buyers to locations with lower demand, such as areas of the inner city that are in the midst of revitalization efforts.

Some cities only offer tax abatements in designated areas, and some may limit these programs to low-to-middle-income property owners.

You can buy a property that already has an abatement, or you can purchase an eligible property, make the required improvements, and apply for the abatement yourself. The former option is considerably easier because it means someone else has endured the headaches of construction and bureaucracy and all you have to do is move in.

Abatements typically won't completely eliminate your property tax bill—you'll still have to pay taxes on the value of the property before it was improved. But the savings can be substantial. For example, the Portland, OR, Housing Bureau said its tax abatement program could save property owners about $175 a month, or about $2,100 a year, for a total savings of $21,000 over 10 years. Without abatement, they might spend about $3,100 a year in property taxes; with it, they might spend about $1,000 a year.

Special Considerations

Properties often must remain owner-occupied to continue qualifying for the tax abatement. In addition, if the property is sold from one owner-occupant to another, the tax abatement will remain with the home. The abatement period does not start over when the property changes hands, however. If the seller has received seven years of abated property taxes, the new buyer would receive the remaining three years of a 10-year abatement.

The easiest way to find out if there are any property tax abatement programs in the area where you want to buy is to do an internet search for "property tax abatement" and the name of your city. For large cities, a neighborhood name might be a more effective search term than a city name. The name of your city or neighborhood plus "real estate listings" plus "property tax abatement" is another effective search string. Knowledgeable real estate agents will also be aware of these programs.

Examples of Tax Abatement

Often, a local government wants to attract or keep businesses in its community. To achieve this, the government can offer a tax abatement in the form of a temporary reduction in general business taxes.

For example, the Ratner Steel Company was given a tax abatement from the city of Portage, Indiana, on the expansion of a local plant and purchase of a $2.5 million steel cutter. In terms of the latter, the abatement stipulated that the company pays no taxes on the equipment in the first year, and is responsible for the total tax amount only after the five-year period is finished.

For the plant expansion project, meanwhile, the tax abatement stretched to 10 years. The city said it signed off on the incentive because the company pledged to add 30 new jobs, boosting the local economy and future property tax revenues.

Another common scenario of tax abatement is property tax abatement. If an individual believes that the assessed value of their property is too high, they can appeal to their local tax assessor for an abatement.

Some localities offer property tax abatement to owners who restore or improve historic properties in designated neighborhoods. Some types of properties, such as those containing nonprofit businesses, can be granted tax abatements based on the owner's tax-exempt status.

Most governments grant abatements to individuals or businesses who bring something of value to the community. They are intended to incentivize positive economic activity.

Benefits of Tax Abatements

Usually, a government only offers a tax abatement when a business or individual provides something of high value to the community. For example, a city government may give a tax break to a business in return for an investment in the city, such as a new retail location, factory, or warehouse.

This provides the added benefit of increased jobs in the area. If Target Corporation is given a tax abatement on property taxes and, in return, builds a retail location in the local community, it ends up adding many job opportunities. Additionally, it increases public good by adding convenience to the city.

A company that benefits from a tax abatement might invest in local infrastructure. A new company may need to increase the number of roadways, water lines, or power lines in the area in order to operate efficiently. While this benefits the company itself, it also benefits the community where the added infrastructure is built.

If cities want to develop land, they can designate development zones. These zones give tax abatements to any housing development in the area, incentivizing people to build homes.

Potential Drawbacks of Buying a Tax Abated Property

Tax abatement lowers your property taxes. How could saving money while getting to live in a new or recently rehabbed property possibly have any drawbacks? Well, there are a few things that could go wrong.

A significant issue is that tax-abated properties are sometimes in less desirable neighborhoods. The tax abatement is an incentive to encourage people to redevelop and move into these areas. Whether revitalization efforts will ultimately prove successful is a big question mark. If the neighborhood doesn't improve, your property value could remain flat or even decline, which could make it difficult for you to sell and possibly cause you to lose a lot of money.

If you continue to live in the home past the end of the abatement period, you'll experience a significant jump in your annual housing expenses. It's imperative that you keep an eye on this deadline and plan for the increase, so you'll be able to afford it when the time comes. If you sell the property after the abatement period ends, you may have to lower your asking price to account for the increase in taxes.

Also, a tax abatement doesn't give you complete certainty over what you'll spend on property taxes. Even during the abatement period, your tax bill could change. Since you're still paying tax on a portion of your property's value, a change in the tax rate or a special assessment could cause your property tax bill to increase.

Since you're being taxed on a lower dollar amount and property taxes are based on a percentage of that amount, any increase probably won't hit your budget too hard, but you should be aware of the possibility for an increase. Of course, changes in tax rates or property values could also cause your bill to decrease, which wouldn't be a problem.

Finally, the city may reserve the right to end your tax abatement if you become delinquent on your property tax payments. If you're responsible for the payments, don't miss any. Alternatively, if your mortgage company pays your taxes, watch your monthly statements carefully to make sure your tax bills get paid.

Most tax abatements expire after a predetermined number of years. If you purchase an abated property, be ready for sharp tax increase sometime in the future.

The Bottom Line

Abatements are special exemptions intended to reduce the tax burden of certain economic activities, generally related to housing and construction. By reducing the price tag of building new housing, local governments seek to make housing more affordable for their population.

What Is a Primary Residence Tax Abatement?

A primary residence tax abatement is a reduction in property taxes for certain houses or condominiums, provided that the owner uses that home as their primary residence. These abatements are typically established by local or municipal governments to reduce housing costs and incentivize individual homeownership.

What Is a 421a Tax Abatement?

In New York State, a 421a Tax Abatement is a tax exemption for real estate developers who build multi-family residential buildings in New York City. The abatement is intended to promote affordable housing by reducing the tax burden on developers.

What Is a 421g Tax Abatement?

The 421g Tax Abatement is a tax incentive intended to encourage housing developments in lower Manhattan. This law reduces the tax burden on developers who convert commercial buildings into multiple dwellings.

What Is a J-51 Tax Abatement?

In New York City, J-51 is a property tax abatement to encourage improvements to apartment buildings. The law reduces the tax burden on developers who renovate residential housing buildings. The exact size of the tax reduction depends on the location of the building and the type of improvements.

Article Sources
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  1. The Chicago Tribune. "Steel Company Wins 10-Year Tax Abatement." Accessed May 4, 2021.

  2. NYC Department of Finance. "421a Exemption." Accessed Sept. 4, 2021.

  3. Department of Housing Preservation and Development. "421-g." Accessed Sept. 4, 2021.

  4. Department of Housing Preservation and Development. "J-51." Accessed Sept. 4, 2021.