If you live in New York City, either renting or owning your own home, you might be familiar with the concept of the 421a Tax Abatement scheme. While the term may seem confusing, it doesn’t have to be. And since you will probably come across it during your time in New York, it’s important to get to know exactly what it entails and how it will affect you.
What is A Tax Abatement?
A tax abatement in general signifies a reduction in the amount of taxes that must be paid on a property. This abatement lasts for a specific amount of time and is applied via a credit on the amount of property taxes owed. Essentially, an abatement is temporary lowering the taxes owed, but this amount increases yearly until it reaches the standard tax amount for that type of property.
An abatement differs from an exemption in that an exemption actually reduces what the homeowner owes by lowering the value assessment on the property. In other words, the property is valued at a reduced amount, meaning that the taxes follow suit and are lowered accordingly.
What is the 421a?
The 421a is a specific tax abatement program that began in the early 1970s. It was introduced to assist in the usage of land that was previously unused or underused. To do this, the program dropped property taxes by a huge amount, in the hopes that this would encourage landowners to build up the land with condos and other housing options. Several of Manhattan’s most popular condos were constructed under this scheme, as it allowed more people to take part in the property game.
Typically, this type of abatement lasted about ten years, which means condos and homes built in the early days of its introduction are now back at standard tax rates. Other exemptions under 421a can last up to 25 years, which provides great relief for homebuyers for a substantial amount of time.
What Owners Pay
While the tax abatement provides much needed respite from potentially crushing property tax rates, it is important to note that this reprieve does not last forever.
Property taxes are continuously on the rise, but it’s important to note that 421a won’t protect you from paying any property taxes at all. Instead, once instigated, property owners will be protected 100 percent from rising property taxes for the first two years. They still will pay the property taxes they had been up until that point. After the first two years, taxes will be raised every couple of years by about 20 percent of the current tax rate until it catches up to the rate in full.
Keep in mind that the tax abatement is for the building, not the owner. In other words, if you purchase a condo that is currently undergoing tax abatement under 421a, you will be paying the rates specified by that abatement. If you sell the condo before the abatement time ends (10-25 years), the new owner will be paying the reduced taxes according to the abatement.
Before You Buy
Before you make a purchase on a home, apartment, or condo, make sure you understand what other costs may arise. It sounds great to have a lower tax rate, but it is wise to do some research on if and how that abatement can change, or if there are any specific laws that regulate the specific properties under abatement.
Another important aspect to consider is if you will be able to afford the apartment or home once the abatement time is complete. If you purchase a home with a drastically low tax rate, are you prepared to pay the full rate in a few years’ time? If you aren’t or know you won’t be able to afford it once tax rates catch up, it may not be a wise purchase for you.
Keep in mind that at times, in order to offset low tax rates, properties may increase other fees for things like maintenance. Look at any extra charges or fees the property has in order to decide if the tax abatement is really worth it for you.