If you’re like pretty much everyone on earth and you don’t like taxes, you’ll love tax abatements! Like a lot of things in NYC real estate, tax abatements sound simple but get complex and can be dangerous if you don’t watch out. We’ll run you through everything you need to know about tax abatements when you’re looking to buy an apartment in NYC.
Table of Contents:
What Is A NYC Tax Abatement?
421-a Tax Abatements
J-51 Tax Abatements
How To Verify A Building’s Tax Abatement
Is Buying An Apartment With A Tax Abatement A Good Deal?
What Are The Dangers Of Tax Abatements For Buyers?
A tax abatement is a reduction of the property taxes in a building. The amount and duration of the reduction is determined by a bunch of factors but generally the benefit lasts 10-25 years.
The first NYC tax abatement, the “421-a” program, got its name from the section of New York Real Property Tax Law establishing it in 1971. 421-a tax abatements are still the most common type found in today’s market.
The other (much less common) type of tax abatement is a J-51. You may also come across SCRIE and CRP abatements but it’s unlikely as those are for very specific types of properties.
The common thread between all types of tax abatements is they are granted to developers and owners in exchange for something the government wants. In other words, they are used to incentivize specific types of construction and improvements.
If you’re apartment shopping and you come across a tax abatement, it’s probably going to be a 421-a. There are about twice as many buildings with 421-a tax abatements as there are with J-51s. Anecdotally, we’d say that understates how much more common they are when apartment shopping.
The main reason 421-a tax abatements are granted by New York City is in exchange for affordable housing. If the developer includes a certain number of affordable units, the city will lower the property taxes on the entire building for a certain period of time.
To know a building has a 421-a tax abatement is only moderately helpful. There are actually four different 421-a schedules and six different codes within the program. Confused? That’s why we’re here!
In the table below, you’ll see the four different terms a 421-a tax abatement can take. Each percentage is the “benefit” and tells you how much the tax will be reduced due to the abatement so the higher the better.
As you can see, there’s a big difference between a 10 year and 25 year tax abatement. Not only is the 25 year tax abatement longer, the benefit is 100% for the majority of the term.
Don’t worry - we’ll go through an example later but for now, remember that when you hear a property has a 421-a tax abatement, your first question should be “Which one?”.
Much less common than 421-a tax abatements are J-51 tax abatements. The J-51 program was started way back 1955 after the city mandated that all buildings needed to have basic utilities such as hot water, central heat and even indoor plumbing. A lot of landlords complained they didn’t have the money to add these to their building. In response, the city implemented the J-51 tax abatement program which allowed landlords to recoup about 75% of what they spent on improvements.
Since then the J-51 program has expanded to cover all sorts of improvements such as elevators, windows, roof work, etc. It was also available when converting commercial or industrial space to residential or a rental building into co-ops or condos.
When you look at which types of owners are eligible for J-51 tax abatements, you start to realize why NYC apartment buyers don’t encounter them very often. They’re either granted to landlords of rental buildings or a very small slice of new apartment supply.
Often the only information you’ll see about a tax abatement is that there is one and which type it is. As we discussed in the 421-a section, that can be amazing or irrelevant depending on the details.
Thankfully, with a few helpful tools, you can easily verify a building’s tax abatement. Let’s use one of our previous listings, 136 Clifton Place #1B, as an example.
136 Clifton Place had an absolutely incredible 421-a tax abatement and we were sure to mention it to all prospective buyers. But how could they see it for themselves? Very easily.
At Yoreevo, we like to look up the tax abatement and then since it can be a little complicated, confirm it with the property’s actual tax bill. Step one is looking up the property’s tax abatement. NYC has a helpful website for just that - you can find it here. You’ll likely want to use the second option ("2. Property Address" in the dark blue bar) which allows you to search more easily.
Once you do that, click on the dark blue bar again. This time it says "421A Exemption".
For 136 Clifton Place, in the first line, you'll see it has a 421-a tax abatement Code 5114. The “Benefit Year” line gives you a hint that it’s a 25 year benefit but how does the benefit trend over all those year? In the chart above, Code 5114 (which is also accessible by clicking “View Calculation Method”) has a whopping 100% benefit for the first 21 years. If you don't have that table handy, you can find it by clicking on "View Calculation Method" at this step.
But apartments are really expensive so let’s make sure we got this right. Using his other helpful NYC government website, we can look up a property’s tax bill. When you look up the most recent “Quarterly Tax Bill” you should see the normal taxes and then a line for the tax abatement labeled "421a". Below that is the net property tax bill - the amount you pay after the tax abatement.
The math will not work out perfectly because of the way the calculations are made. In this scenario, despite having a 100% tax abatement, the property tax bill is actually about $72/month compared to the unabated taxes of $740/month. Still pretty good!
All else equal, an apartment with a tax abatement is better than one without but it's never that simple. Since you'll pay less in property taxes, an apartment with a tax abatement should cost more upfront. But how much more? Is an apartment with a tax abatement worth twice as much as one without one? Probably not. So how much more is it worth?
To keep it very simple, you should look at how much the tax abatement is "worth" by seeing how much of a benefit you will receive. How much will you save on property taxes because of the abatement? Your real estate broker should be able to help you navigate the math. If you’re not well versed in tax abatements, make sure to get help from someone you trust. If you take the blanket approach that all tax abatements are good, you could get into trouble which brings us to...
Take a look at 421-a tax abatement table above again. Say you’re looking at a property with a 25 year term abatement (Code 5114). 100% benefits? That’s awesome! Look at the taxes - extremely low!
If you stopped your analysis there, you could be in for a nasty surprise in a few years. If the property is in year 21, taxes are about to jump meaningfully. In fact, within five years, there won’t be any tax abatement at all.
On top of a higher near term property tax bill, the resale value of the apartment may go down since it no longer screens as having low property taxes.
All else equal, a tax abatement is always good - it’s just a question of how much you pay for it. You need to make sure you know how much you’ll save with a tax abatement and for how long to determine how valuable it is.
Tax abatements increase the complexity of valuing a NYC apartment and Yoreevo is happy to help you navigate the process. By combining a tax abatement with a commission rebate, you’ll be saving money left and right!
Note: This article is meant to be informational and should not be used as tax or legal advice. If you have any questions about your particular transaction or situation, please contact your accountant or attorney.