You might have seen 421a Tax Abatement already while looking for a co-op or condo in New York City. Like many, you must have wondered what 421a tax abatement is.
To give you a general idea, the Tax Exemption was framed to encourage property developers to build new residential real estate in NYC. The more recent development on 421a tax abatement is aimed at affordable housing.
The Idea to give tax exemption was floated in 1971 to court developers to develop unused and underutilized land. Reduced property taxes for a set amount of time, typically between 10-25 years was seen as a breakthrough to encourage them.
Current Status of the 421-a Program:
The city’s 421-a tax exemption program expired in 2016. Instead, the New York State legislature instituted another version of 421-a tax law.
This time, the focus was shifted to focus on giving tax exemption to developers who agree to offer both affordable housing units and pay higher wages for construction workers.
How to know if your Property qualifies the Criteria?
There are two vide categories that cover the properties.
Rental projects are the ones where one or more multiple dwellings in which all dwelling units are operated as rental housing while “Homeownership Project”- a multiple dwelling or portion thereof operated as “condominium or cooperative housing.”
Other criteria are as under:
- The property contains a minimum of six units and more
- The building is new construction of converted legally the construction is started on or after 1/01/2016 and on or before 12/22/2022 within the limits of law in good faith.
What is the impact of the 421a Tax Abatement?
The tax exemption has proven to be a great success. It has helped initiate thousands of Manhattan condominium projects as well as creating thousands of affordable housing units.
If you look at the scale of development it brought to the city, it would not be fair to rate it quite high. The construction projects were not merely buildings but created a huge market for jobs and revenue which were by-products of the whole scheme.
Is it a good idea to take advantage of the 421a tax abatement?
To give a straight answer, an apartment with a tax abatement is better than one without. However, it’s not that simple a math. You will be paying less in favor of property tax but tax abatement should cost more upfront. This is where you need to take a wise down and know how much more cost at upfront?
A simple trick is to look at how much the tax abatement is “worth” by seeing how much of a benefit you will receive. Given the technical aspects of laws related to real estate, it is less likely that you could navigate through the ocean of details attached to it. The better strategy is to consult with your real estate broker about it. Or if you don’t have such a facility, try to get the help of someone your trust.
Do not go at it without any information as you might end up in trouble and have to pay more than you intend to save.
Where does the danger lie for buyers?
You might look at the 421a tax abatement table and see a property with a 25-year term abatement and figure out 100% benefit in there as taxes are extremely low. If you could see only this then you are only looking half of the picture.
You might be surprised to know that if the property is in year 21, taxes are about to jump meaningfully, and in five years, there won’t be any abatement at all.
In addition to it, the property will lose the price in resale as it no longer will be having low property taxes.
To make things simple for you, 421a tax abatement is always good only if you know it inside out. You need to know how much you’ll be benefitting and for how long to determine how valuable it is.
- The 421-a program is intended for the developers in New York City.
- The builders who construct multi-family housing on vacant spaces or underutilized.
- It is applied to newly built, market-rate, and multi-family housing units.
- The converted multi-family residential building falls under the J-51 tax exemption.
- To qualify for the criteria of tax exemption, new development units have to be affordable.
Enhanced Affordability Areas:
Under the provision of this law, three “enhanced affordability areas” which are eligible for a 35-year benefit have been considered.
- The area located in the south of 96th Street in the Manhattan borough.
- The area one mile in from the bulkhead in Community Boards 1 and 2 in Brooklyn borough
- The area one mile in from the bulkhead in Community Boards 1 and 2 in the Queens Borough.
Rules for enhanced affordability areas:
Buildings within these areas with more than 300 residential units are subject to a 100% tax exemption for up to three years during construction as well as a 100% exemption for 35 years after construction is finalized.
The developer has to pay the property taxes on the property which was paid before the exemption.
However, developers are not liable to pay taxes on the increased value of the property in the duration of the exemption period.
The bottom line:
Given the historical role in the development, 421a tax abatement was a huge success then and equally important now. Taking advantage of such schemes really gives developers an economical advantage and in the parallel community is developed.
We wish now you have a sound knowledge about 421a tax abatement. Look at the options where you can take the maximum advantage out of it.
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