Abatement
What Is an Abatement?
An abatement is a tax break offered by a state or local government on certain types of real estate or business opportunities. A governing body may use an abatement – sometimes called a tax holiday – as an incentive to encourage new business development or activity or to discourage an existing business from going elsewhere.
A tax abatement typically comes in the form of reduced property taxes. Examples include a reduction in tax penalties or a rebate of previously paid taxes. Abatements usually are set for a specific period, after which taxation rates return to their normal level. The periods can range from a year or two to even decades.
Another form of abatement is a rent abatement [1] or an agreement between a landlord and a tenant that provides a period of free or reduced rent.
The term abatement in law refers to removing or controlling an annoyance or to a situation where a legal proceeding is closed, suspended, or interrupted before a court decision is made.
How Do Tax Abatements Work?
The purpose of tax abatement programs is to attract home buyers and business owners to locations with low demand, such as areas in the midst of urban revitalization efforts. Some municipalities limit tax abatements to low- to middle-income buyers, while others set no limitations.
Just as debt can be inherited, an individual or a business can purchase a property that has a pre-existing abatement, or they can buy a property, improve it, and then apply for an abatement. Of course, the first option requires far less time and effort.
Typically, an abatement will not eliminate a property tax bill entirely. However, property owners may only have to pay the tax on the property's value before improvements are made. In many cases, the savings in tax reduction can be substantial.
What Are the Requirements for a Tax Abatement?
Eligibility requirements for tax abatements can vary from state to state and municipality to municipality. Here are some of the typical requirements for a tax abatement:
- The property must remain owner-occupied.
- If the property is sold, the tax abatement remains with the home under the current abatement period.
Many state and local governments require an abatement application. Your application could be denied in some locations because of your income level. In others, you might have to make environmental or other improvements to the property before you even apply for an abatement.
Another roadblock could be the owner-occupied requirement. In some instances, an owner may have to move into a building while extensive renovation work is being done to fulfill the abatement application requirements.
In other cases, the approval process can be lengthy. The property owner must be prepared to pay the full tax rate until a reduction is awarded.
What Are the Pros and Cons of Tax Abatements?
A local or state government usually offers a tax reduction in return for the property owner's investment in the area, such as a new retail location, factory, or warehouse. The government may view the new business (LLC or Corporation) as something that will bring new job opportunities to an area and increase the public good.
The hope is also that the company will use the savings in business taxes to invest in the community in other ways, such as improving its infrastructure with new or improved roads, water lines, and power lines.A state or local government also may give tax abatements to individuals or companies that want to build new homes that will help revitalize a community.
A drawback to the abatement strategy occurs when a neighborhood or community doesn't improve as planned – or even deteriorates further. When the abatement period expires, the property owners could find themselves in the unfortunate position of having to pay higher taxes and unable to sell the property at the desired price.
Additionally, since an owner is still paying some taxes during the abatement period, a tax bill can fluctuate. A change in the overall taxation or a special assessment can lead to a property tax increase. The government has the right to end the tax reduction if an owner becomes delinquent in their payments.
In this table we have a summary:
| Pros | Cons |
|---|---|
| Money saved by reduced business taxes can be invested in other parts of the community | Community may deteriorate and ultimately hurt property owners |
| May contribute to neighborhood revitalization | Changes in taxation can increase property taxes |
| Savings can allow business owners to create jobs in the area | If payments are not on time, the abatement can end |
How to Find Out If You Qualify for an Abatement Program
One way to discover if there are any abatement programs in the area where you want to buy property is by doing an internet search for "property tax abatement." Many locations have local sites that can show you how to file, such as this one for the city of Boston. You'll need to search by neighborhood name instead of only city name for large cities.
A knowledgeable local real estate agent also should be aware of property tax abatement programs in the area. It is wise to ask for complete abatement disclosures and the timeframes of any property tax abatements program as part of your due diligence in buying a property.
Helpful Resources:
Black's Law Dictionary - Abatement Definition & Meaning
[1] - https://33realty.com/blog/what-is-rent-abatement
National Housing Conference - Tax Abatements: The Basics
SmartAsset - What Is a Tax Abatement?
Local Housing Solutions - Tax Abatements or Exemptions
What Is an Abatement?
An abatement is a tax break offered by a state or local government on certain types of real estate or business opportunities. A governing body may use an abatement – sometimes called a tax holiday – as an incentive to encourage new business development or activity or to discourage an existing business from going elsewhere.
A tax abatement typically comes in the form of reduced property taxes. Examples include a reduction in tax penalties or a rebate of previously paid taxes. Abatements usually are set for a specific period, after which taxation rates return to their normal level. The periods can range from a year or two to even decades.
Another form of abatement is a rent abatement [1] or an agreement between a landlord and a tenant that provides a period of free or reduced rent.
The term abatement in law refers to removing or controlling an annoyance or to a situation where a legal proceeding is closed, suspended, or interrupted before a court decision is made.
How Do Tax Abatements Work?
The purpose of tax abatement programs is to attract home buyers and business owners to locations with low demand, such as areas in the midst of urban revitalization efforts. Some municipalities limit tax abatements to low- to middle-income buyers, while others set no limitations.
Just as debt can be inherited, an individual or a business can purchase a property that has a pre-existing abatement, or they can buy a property, improve it, and then apply for an abatement. Of course, the first option requires far less time and effort.
Typically, an abatement will not eliminate a property tax bill entirely. However, property owners may only have to pay the tax on the property's value before improvements are made. In many cases, the savings in tax reduction can be substantial.
What Are the Requirements for a Tax Abatement?
Eligibility requirements for tax abatements can vary from state to state and municipality to municipality. Here are some of the typical requirements for a tax abatement:
- The property must remain owner-occupied.
- If the property is sold, the tax abatement remains with the home under the current abatement period.
Many state and local governments require an abatement application. Your application could be denied in some locations because of your income level. In others, you might have to make environmental or other improvements to the property before you even apply for an abatement.
Another roadblock could be the owner-occupied requirement. In some instances, an owner may have to move into a building while extensive renovation work is being done to fulfill the abatement application requirements.
In other cases, the approval process can be lengthy. The property owner must be prepared to pay the full tax rate until a reduction is awarded.
What Are the Pros and Cons of Tax Abatements?
A local or state government usually offers a tax reduction in return for the property owner's investment in the area, such as a new retail location, factory, or warehouse. The government may view the new business (LLC or Corporation) as something that will bring new job opportunities to an area and increase the public good.
The hope is also that the company will use the savings in business taxes to invest in the community in other ways, such as improving its infrastructure with new or improved roads, water lines, and power lines.A state or local government also may give tax abatements to individuals or companies that want to build new homes that will help revitalize a community.
A drawback to the abatement strategy occurs when a neighborhood or community doesn't improve as planned – or even deteriorates further. When the abatement period expires, the property owners could find themselves in the unfortunate position of having to pay higher taxes and unable to sell the property at the desired price.
Additionally, since an owner is still paying some taxes during the abatement period, a tax bill can fluctuate. A change in the overall taxation or a special assessment can lead to a property tax increase. The government has the right to end the tax reduction if an owner becomes delinquent in their payments.
In this table we have a summary:
| Pros | Cons |
|---|---|
| Money saved by reduced business taxes can be invested in other parts of the community | Community may deteriorate and ultimately hurt property owners |
| May contribute to neighborhood revitalization | Changes in taxation can increase property taxes |
| Savings can allow business owners to create jobs in the area | If payments are not on time, the abatement can end |
How to Find Out If You Qualify for an Abatement Program
One way to discover if there are any abatement programs in the area where you want to buy property is by doing an internet search for "property tax abatement." Many locations have local sites that can show you how to file, such as this one for the city of Boston. You'll need to search by neighborhood name instead of only city name for large cities.
A knowledgeable local real estate agent also should be aware of property tax abatement programs in the area. It is wise to ask for complete abatement disclosures and the timeframes of any property tax abatements program as part of your due diligence in buying a property.
Helpful Resources:
Black's Law Dictionary - Abatement Definition & Meaning
[1] - https://33realty.com/blog/what-is-rent-abatement
National Housing Conference - Tax Abatements: The Basics
SmartAsset - What Is a Tax Abatement?
Local Housing Solutions - Tax Abatements or Exemptions