Tax Abatement: How Does It Help You Save on Property Taxes?

Property tax rates vary depending on where you live. But typically average between 1 percent and 3 percent of a property’s value.

Let’s say your home is worth $200,000 and your local tax rate is 2 percent. In this scenario, you’ll pay about $4,000 a year for property taxes (or $333 a month).

Mortgage payments factor in property taxes.

So:

Living in a city with a higher tax rate can impact affordability once you’re ready to buy a home. 

If you’re eligible for a tax abatement, though, you’ll receive a tax break on your property. This can put more homes within your reach. Learn how a tax abatement can make homeownership cheaper.

What is a Tax Abatement?

A tax abatement is a government tax incentive program that can reduce or eliminate your property tax rate for a certain period of time.

Abatements vary, with some lasting only a few years, and others more than a decade.

If you’re thinking about buying a home, you’ll need to take several expenses into consideration. There are mortgage-related expenses such as a down payment and closing costs. 

Also, your mortgage payment includes the repayment of principal and interest. Along with repayment of homeowner’s insurance and property taxes.

The good thing about purchasing a home is that you’ll pay off the property (if you live in it long enough). This eliminates principal and interest payments, and homeowner’s insurance. 

The super long-term cost is property tax.

It's an expense that you’ll pay for as long as you own the house. This applies even when you don’t carry a mortgage on the property.

Whether you have a mortgage or own your property outright, a lower tax rate through an abatement program can result in significant savings.

This can make a particular property more affordable. And if you’re a first-time buyer, help you buy a home much sooner.

Why Do Certain Cities Offer Tax Abatements?

Many cities and states offer tax abatement programs.

The purpose is to attract homeowners and developers to certain areas.

Some cities and neighborhoods have a lower demand for housing. Properties within these areas might be old, vacant, or distressed. As a result, fewer families move into these communities. 

The local government uses these tax programs to lure buyers and encourage revitalization efforts in select neighborhoods.

Several new construction properties, revitalization projects, and rehab properties qualify for abatement. The goal is to boost the appearance and attractiveness of neighborhoods. Revitalization can get rid of properties that sit abandoned or worn down for years. 

The details of each program differ.

In a nutshell:

Many programs allow property owners to renovate homes. Yet they only pay taxes on the property value “before” improvements. 

These programs are a win-win for local governments and property owners. 

Revitalizing and rehabbing homes can improve the condition of the neighborhood. And in turn, increase the value of properties in these areas.  

Improved neighborhood conditions attract other buyers and developers to the area. They may also be eligible for a tax abatement.

The end goal:

Stimulate and boost the local neighborhood.

How to Find a Tax Abatement Program?

Tax abatement programs are available across the country. Although some people have never heard of these programs. 

Finding a program is easier than some realize.

In most cases, all you need to do is conduct an online search for “tax abatement programs in ”.

You can even narrow down the search. For example, you can look for programs specific to a neighborhood.

Example #1: Cleveland, OH

Maybe you want to search for “tax abatement programs in Cleveland, Ohio.” A search will provide information on the city’s Residential Tax Abatement Program.

According to the website, the city of Cleveland “will temporarily eliminate 100 percent of the increase in real estate property tax that results from certain eligible improvements on eligible residential housing projects.” 

The abatement remains in effect for 15 years. Eligible properties including new construction single-family, two-family, and multi-family investor-owned properties.

The program also includes the rehabilitation of single-family, two-family, and residential multi-family homes. 

Those who qualify only pay property taxes on the assessed value of their land and building. This is before improvements.

The low tax rate remains in place until the abatement expires.

Example #2: Detroit, MI

Do you live in Detroit? If so, you could be eligible for the Neighborhood Enterprise Zone Program tax abatement.

This program also stimulates the rehabilitation and development of residential properties in certain zones.  

Eligible property owners receive a reduction in their property taxes for up to 15 years.

Pros

For properties with a tax abatement period, these are the advantages:

The long-term tax savings can be significant

You’re either taxed at a lower tax rate or you’ll only pay taxes on the property value before improvements.

To illustrate, let’s say the value of your property jumps from $120,000 to $200,000 after improvements. If your city has a local tax rate of 2 percent and you’re eligible for a 15-year tax abatement, you’ll save over $23,000 in property taxes.

You can get more house for your money

On average, monthly mortgage payments cannot exceed 28 percent to 31 percent of a borrower’s gross monthly income.

This factors in:

• repayment of principal
• interest
• homeowner’s insurance
• PMI
• property tax

With that being said, a lower tax rate can help you qualify for a more expensive home because the home’s total monthly payment will be lower due to the tax break.

It might be easier to sell a home

One benefit of this program is that the abatement remains with the home until it expires—even if it’s sold.

So if you sell your house and there’s seven years left on your abatement, the buyer reaps the benefit.

Cons

There are clear reasons that tax abatement programs exist and that could sway you away from certain properties:

Property may be in an undesirable area

Remember, tax abatement programs stimulate growth and revitalization in certain neighborhoods.

So many areas eligible for abatement are in need of revitalization. This often means moving to a “not-so-attractive” part of town.

Other revitalization efforts might be ongoing in the neighborhood. Even so, it could be years before the area sees significant improvement.

Property tax bill to increase once the abatement ends

At the conclusion of the abatement period, you’ll begin paying taxes on the assessed value of your property “after” improvements.

For some, this results in a significant increase in their property tax bill and monthly mortgage payment.

Plan ahead for this increase to avoid payment shock.

Property tax delinquency could end your abatement

If your property is paid off, it’s important that you stay current on any property taxes you owe.

Defaulting on your property taxes could cause the city to revoke your abatement. At which point you’re required to pay the higher tax rate. If you still have a mortgage on your property, check your statement regularly.

Make sure your mortgage company pays your property taxes as scheduled.

Some abatements have income restrictions

Keep in mind that some tax abatements are only available to those at certain income levels.

Typically, programs are for low-to-middle income families.

It helps them purchase homes that would otherwise be out of their reach. If you’re a high earner, you may not be eligible for a tax abatement.

What to Know When Shopping for a Property?

Are you okay with the idea of buying a home in an area under revitalization? And are okay with improving or rehabbing a property?

If so, let your real estate agent know. 

Your agent can show you homes that have an abatement already in place. They can also find information on whether a particular neighborhood qualifies for a tax abatement.

Buying a home with a tax abatement in place is the easiest approach.

But you need to ask an important question:

How many years are remaining on the abatement? 

If an abatement ends in a few years or sooner, only buy the house if you’re able to afford a higher tax bill in the near future.

If a property doesn’t have an abatement, but is eligible, you can apply for one yourself. 

The application rules differ depending on location. Some cities may allow you to submit an application for abatement before making improvements to a property.

Other cities ask homeowners to make improvements first. Only then can you apply for a tax abatement. 

Final Word

A tax abatement is an excellent way to save on property taxes for an extended length of time.

But although an attractive program, make sure you understand the drawbacks. 

Moving to a less desirable neighborhood might result in being farther away from work.

Or, the area might be in need of significant revitalization.

In which case, it can take years for the appearance of the community to improve.