The Difference Between Tax Abatements and Tax Exemptions

Tax abatements and tax exemptions can be granted to city developers and home buyers to promote development and occupancy rates. While there are similarities, they are two very different programs.

What is a tax abatement?

A tax abatement is a reduction in property taxes for a specific period of time. It is most commonly applied to condominium or co-op units, but can apply to any type of real estate. It involves the application of a credit to the total taxes owed.

Though situations may vary, generally property taxes in a tax-abated building remain very low for the first few years of the abatement. As the years go on, taxes will begin to inch up each year until standard taxes are owed on the property.

Abatements can also be structured so that a developer only pays a specific percentage of taxes due, such as 50%, for a specific period of time, say 20 years. When the abatement period is over, taxes go back to regular levels.

A third option is a property tax abatement that freezes property taxes. In this case taxes are frozen to the levels they are at when the abatement is signed. This allows a development company to build on and make improvements to the property without increases to its tax bill.

Not all tax abatements are issued to attract developers. In some up-and-coming neighborhoods, local governments may offer tax abatements to buyers who are willing to purchase homes in low-demand areas. This type of tax abatement may be offered to anyone who buys in the designated area or only to low- or middle-income buyers. In many situations, this type of abatement requires that the home remain owner-occupied, but if the property is sold then the abatement can be transferred from seller to buyer.

In most cases, property tax abatements are granted by city or county governments, which is where most property taxes are paid. Property tax abatements that are issued to developers can be issued on a case-by-case basis to a particular company or as entitlement subsidies like enterprise zones.

What is a tax exemption?

A tax exemption reduces the taxable value of a condo or co-op’s assessment so as to reduce the total property taxes owed.

The exemption is credited toward the real estate taxes due because the owner qualifies for one or more personal tax exemptions, and is tied to the person or entity paying the taxes – not to the property. That said, the same owner may qualify for a tax exemption on one property and not on another.

The difference between a tax abatement and a tax assessment

The difference is fairly simple: an exemption reduces the taxable value of a property, which in turn lowers the taxes owed. An abatement reduces the taxes directly, for a specific period of time.

If you’re interested in a NYC property, you can easily check on PropertyShark if it is currently subject to any tax exemptions or abatements. Simply type in the building’s address, open it’s full property report and click on the Tax tab. This section of the property report will also include historic and estimated future tax data.