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What Is Tax Abatement? Definition, Overview, and How It Works


What Is Tax Abatement

Tax abatements are an agreement between the government and property owners, where the government offers to reduce the amount of property tax bills for a specific timeframe to enable property owners to carry out renovations and improvements on their properties. 

Tax abatement incentives are beneficial to the government because it helps them bring economic developments to unfavorable areas of a city.

Here we’ll be looking at what tax abatement is. How does it work? And the benefits and the downsides.

What Is Tax Abatement?

Tax abatement is a reduction or exemption on the amount of tax they expect a company or individual to pay. A tax abatement is a reduction in the tax people or companies are supposed to pay.

Tax Abatement aims to eliminate or decrease a tax fee that is required from a company or an individual. Reductions in penalties are examples of tax decreases.

For instance, if a company or an individual gets to pay a tax fee above their expected remittance or they receive a high tax bill, they can ask for an abatement from the tax authorities. 

Tax abatements are temporary. They don’t last forever, but then they could cover a timeframe of months to over a decade. It all depends on the jurisdiction you’re in. Tax abatements commonly apply to real properties.

You should also know that tax abatement differs among countries, states, or even municipalities. It could also apply to some unique properties like new homes or houses in specific locations.

The tax agency handles the amount of tax abatement bills individuals or companies pay. 

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How Does Tax Abatement Work?

Tax abatements are government incentives that aim to significantly decrease or exempt the number of tax bills.

The government uses this to promote some beneficial economic activities like investment in capital projects.

A situation where tax abatement applies is the reduction or exemption of property tax bills paid on enormous improvements or new construction. Examples of tax abatement are property and business tax abatements. 

When dealing with property tax abatement, they might not completely exempt you from paying property tax bills because you’ll still pay tax on the value of your property before renovation or improvement was made.

However, with tax abatement, you’ll be able to save some money from paying a little tax bill compared to what you’ll pay if there was no tax abatement.

For properties to keep getting tax abatement benefits, people must always occupy them. Tax abatement will remain on a property, even if the ownership of the property changes. It doesn’t start all over if property ownership changes.

For instance, if a property owner has qualified for tax abatement incentives seven times and he sells the property to a new owner, the new will only pay tax abatement three times. Tax abatements last for a specific timeframe, after which they’ll expire.

Tax abatement performs several functions like reduction in the cost of living in locations they’re implemented, improving local economic growth by helping in new construction and development of properties, and helping in the increment of property valuation.

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What are The Benefits of Tax Abatement?

Tax abatements are not just beneficial to individuals or companies but also to the economy.

They offer lower tax rates to property developers for a predetermined timeframe. It is also an incentive used by the government to avoid losing businesses with high employment in some locations.

Here are some benefits of tax abatement:

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Tax abatement strengths businesses

Other existing businesses benefit when a new business opens because it means more patronage.

The growth of customers means more investment in capital improvement for existing businesses and new employees.

Tax abatement reduces unemployment

New businesses mean new jobs and growth in employment. And more money provides the means for individuals to build houses, buy cars, and goods, and satisfy human wants. 

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Tax abatement provides a flexible economic development tool

Abatements offer more flexible choices compared to other economic growth incentives because infrastructural facilities are always expensive.

Tax abatement makes it economically feasible to build on some locations because of things like pipelines.

Tax abatement increases tax revenue

Even with tax abatement, the government still has a lot to gain. With new businesses comes new employees, which means more patronage for local stores (sales tax).

It also means they will build more homes (property tax). Both taxes go to the government’s revenue.

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Continuous tax receipt even after the expiration of tax abatement

Established businesses will keep improving and adding new equipment that can be taxed.

Tax revenue gotten from developed properties is always higher than taxes on undeveloped properties. 

What Are The Cons of Tax Abatement?

Tax abatement though has a lot of economic benefits, but also has some disadvantages. Some issues with tax abatement include:

Tax abatement incentives can make individuals or businesses relocate to undesirable cities

Most tax abatement incentives are always centered on developing undesirable cities or locations. Because of this, some individuals or businesses might have to relocate to unappealing places.

Tax abatements are not the only criteria you should consider when relocating to these neighborhoods. Other things to consider here include the crime rate, quality of education, and accessibility to basic utilities.

It could also improve homeownership and could only be available for middle-class individuals and properties up to a specific amount. 

Tax abatements are temporary

Since tax abatements last for a specific timeframe, businesses and individuals are advised to prepare for when it expires because the increment in tax bills might get discouraging.

You don’t want to get shocked when your monthly or annual tax debt increases. 

Tax abatement on improved properties

Tax abatements are sometimes claimed on the value you added to the property by making improvements.

It simply means you’ll pay tax on the value of your property before renovations and improvements are made. 

Tax abatement requirements can be modified

Tax abatement requirements can be changed or can be modified. Most states or jurisdiction have their own rules and regulations guiding tax abatements. 

Federal, state, or local governments can enact a new bill stating the new requirements for some tax abatement agreement.

Tax abatement doesn’t control the amount of tax you pay

Tax abatements have nothing to do with the total amount of tax bills you’re eligible to pay in a month or year. There could be an increment in property valuation and tax bills.

There are factors you don’t have control over that can influence your tax liability either negatively or positively. Except where your property is eligible for 100% tax abatement, your tax bills might defer annually. 

Why Does The Government Offer Tax Abatement?

Tax abatements are incentives used by the government to target less developed parts of the country.

Providing tax abatement to eligible individuals or companies can help bring about the economic growth and development of undeveloped cities.

When private property owners develop and renovate their properties they’ll be able to attract new buyers, residents, and businesses to that city.

At the expiration of the tax abatement period, the government will also benefit more because there’ll be an increment in property tax bills.

Tax abatement also promotes economic growth, improves the standard of living, creates new jobs, and more. The government offers tax abatements on new construction projects to promote the building and development of new homes and commercial properties.

They’re aimed at making individuals or businesses help with urbanization. It encourages people or businesses to buy, refurbish, and renovate historic properties. 

How Much Will Tax Abatement Save You?

Tax abatement incentives are different because it depends on the reason they started it. Criteria like the duration of the tax abatement, the local property tax bills, and also influenced the amount of money you’ll save on tax abatements the amount of tax benefit a property can enjoy.

Some tax abatement eliminates the tax liability on a property while some help you save some amount on your tax. You should also know that the tax agency determines the amount. 

Examples of cities with real property tax abatement incentives in the United States of America are:

1. California

The city of California’s Mills Act offers a tax abatement incentive for the renovation and preservation of historic properties.

The local government agrees on the tax abatement of these properties on a case-by-case basis with eligible owners of historic properties.

Property owners could get property tax savings of 40% to 60% annually. 

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2. City of Philadelphia

In Philadelphia, new construction and rehabilitated homes are eligible for a 10- year, 100% tax abatement on the value of the improvement.

People who own properties usually pay tax on the value of the properties before the new construction and rehabilitation.

The 100% tax abatement became effective from Dec 31, 2020, and it will be decreased by 20% over the 10 years. 

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3. City of Cleveland

In Cleveland, recently constructed single-family houses get a tax abatement of 100% of the increase in real estate property tax for 15- years.

In this case, property owners are only eligible to pay tax abatement on the value of the property before it was improved. Residential properties must comply with the Green Building Standards. 

4. City of Portland, Oregon

The city of Portland offers tax abatement to eligible single-family, owner-occupied properties in specific locations known as Homebuyer Opportunity Areas for a 10- years property tax abatement on the value of improvements from rehabilitation or recent construction. Individuals who own properties pay a tax on the value of the property before it was the new construction or rehabilitation. 

5. City of Des Moines, Iowa

In this city, the property tax abatement percentage differs depending on the location of the property or improvements made.

New improvements or renovations under $23,000 in any part of the city are eligible for 10- a year, 115% tax abatement.

Renovations and improvements over $23,000 are eligible for 100% tax abatement. Rehabilitations and new constructions are eligible for tax abatement for six years in any part of the city at a decreasing rate.

While properties in specific areas are eligible for a 10- year abatement at a decreasing rate.

6. City of St. Louis

In St Louis, newly constructed properties on vacant lands or gut renovations of existing properties are eligible for property tax abatement for 5_10 years, during which they will deduct the tax rates from the value of the property before renovation.

Are You Eligible for Tax Abatement?

Tax abatement generally applies to properties or businesses, it has nothing to do with you but the property.

Since tax abatement is based on factors like the property value, kind of construction, and renovation, and are tax abatement is available to individuals who buy the properties. 

Your annual earnings could also impact the eligibility for a tax abatement. You should thoroughly check out the requirements laid down by the tax agencies in your location.

If you satisfy all the requirements, then you’ll be offered a tax abatement if you’re the property owner.

Since tax abatement applies to the properties when it is sold to new owners and the abatement period remains 4 years, the new owners get the benefits of those years. Tax abatement periods do not start all over if you sell your property.

FAQs

What are tax abatements?

The government uses tax abatement incentives to help property owners pay a reduced tax owed in exchange for the renovations of properties. 

Why does the government offer tax abatement?

The government provides tax abatement to help individuals or businesses move to new locations or grow their existing businesses. It reduces the cost associated with renovations and new constructions. They also offer it to help underdeveloped locations get development. 

What are the pros of tax abatement?

The pros of tax abatement incentives are reduction in the unemployment rate, increment in tax revenues, bringing growth to undeveloped economies, and it strengthening other businesses.

Are there requirements for granting abatements?

Yes, before granting abatements, every taxing unit should pass a bill stating its desire to grant tax abatement and publish rules and policies that will govern the abatement agreements. 

What type of properties receive tax abatement?

Properties that receive tax abatement are personal properties, taxable real properties, or both. 

Can any local government grant tax abatement incentives?

Only local governments that receive ad valorem tax abatement but basically cities and counties are eligible to grant the first tax abatement on a particular property.

What types of properties are exempted from tax abatement?

Nonprofit organizations that don’t qualify for state and federal tax cannot be granted tax abatement because they’re fully or partly excluded from property tax.

What is the difference between tax abatement and tax exemption?

Tax abatement and tax exemption have similarities, but then tax abatement decreases the tax paid on a property for a specific timeframe, while tax exemption reduces the taxable value of the property, reducing the amount of tax liability.

Conclusion

Tax abatements are incentives granted by the government to reduce the amount of tax paid by individuals and businesses on assets like properties.

Through these incentives, the bills of housing become affordable for individuals, especially those in the middle class. 

Tax abatement saves more money for property owners. It makes the building more appealing and affordable for prospective buyers. One downside of tax abatement, however, is that the properties could be in undesirable cities.

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