How Do Tax Abatement Programs Work?
What Is a Tax Abatement?
A tax abatement is a property tax reward federal government entities provide that will lower or remove taxes on real estate in a specific area. Tax abatements can last anywhere from just a few months to multiple years at a time. Low- to middle-income residents are usually the target demographic for these programs. Although towns and cities usually offer most tax abatements, there are state and federal government programs as well.
You'll be able to obtain the benefits quickly if you buy a home that is already qualified for a property tax abatement. Your property tax bill will be decreased, or waived entirely, for the duration of the abatement period. However, issuing entities can revoke the abatement.
Am I Eligible for a Tax Abatement?
There's no definitive answer regarding when and if you'll be qualified for tax abatement. Because eligibility requirements differ extremely from town to municipality and state to state, this is. To gain approval, lots of government entities will likely ask you to submit an abatement application. There are a variety of factors you can keep an eye out for, though, to identify if you'll fit into the standards for an abatement.
Most significantly, many tax abatements feature income specifications for new property owners. In general, these programs are meant for low- to middle-income individuals and households whom real estate tax may considerably impact. If you make too much, a tax abatement might be beyond your reach.
In some cities, you may have to work for your tax abatement. You may need to remodel or make environmental improvements to the property before requesting a property tax abatement. This lengthy procedure can be a headache, so make sure you have adequate cash to cover the unabated property taxes in the meantime.
Tax abatements frequently call for brand-new homeowners to move into eligible houses throughout an exact time period. This could be a major issue for anyone aiming to move into a brand-new place before or after these pre-decided windows.
6-STEP TAX ABATEMENT PROGRAM PROCESS
According to the Texas State Comptroller, Tax Code Chapter 312 governs reinvestment zones and tax abatements. This chapter enables property taxing entities, excluding school districts, to curb the property taxes assessed on tangible personal property or real property due to the improvements or repairs to the property. Only the property located within a reinvestment zone qualifies for a tax abatement agreement. Hence, a tax abatement agreement is an agreement limiting the increase in the value of the property taxes due to improvements or repairs to real property. Such agreements are limited to ten (10) years.
A city or county designates a reinvestment zone in six steps.
Guidelines and Criteria: Each taxing unit that wants to consider tax abatement proposals must adopt guidelines and criteria for the creation of a reinvestment zone and must hold a public hearing.
Resolution: Each taxing unit that wants to consider tax abatements must also adopt a resolution indicating its intent to participate in tax abatement. The resolution must be adopted at an open meeting by a majority vote of the taxing unit's governing body
Public Hearing: Seven days' written notice of the public hearing must be given to the presiding officer of each of the other taxing units that have taxing jurisdiction over real property within the zone. Notice of the hearing must also be published at least seven days before the hearing in a newspaper of general circulation in the city. At the public hearing on the reinvestment zone, the governing body must find that the improvements sought are feasible and would benefit the zone after the expiration of the agreement, and the zone meets one of the applicable criteria for reinvestment zones.
Designate a Reinvestment Zone: After the hearing has taken place and the guidelines and criteria have been adopted, the taxing unit may, by official action, designate a reinvestment zone. Designation of an area as an enterprise zone under Chapter 2303 of the Government Code constitutes designation of an area as a reinvestment zone without further hearing or other procedural requirements by the local taxing unit.
Tax Abatement Agreement: After the designation of the reinvestment zone, the governing body of a taxing unit may enter into a tax abatement agreement under this chapter if it finds that the terms of the agreement and the property subject to the agreement meet the applicable guidelines and criteria adopted by the governing body under this section.
Written notice: A taxing unit's intent to enter into a tax abatement agreement must be delivered to the presiding officer of each of the other taxing units in which the property is located at least seven days before the abatement is granted. The other taxing units may enter into an abatement agreement or choose not to provide an abatement. There is no penalty for choosing not to provide an abatement.
Problems with Tax Abatements…
Tax abatement programs can incentivize households and individuals to move into less preferable communities. So in spite of the advantages of abatements, you might not be delighted with where you must move to get them. Some things to think about consist of the relative crime rates and quality of schools, to name a few.
Since tax abatements are short-lived, qualified homeowners will need to get ready for when they run out. When the time comes, the rise in your bills could be a shock, so talking with a Tax Advisor might be a worthwhile investment.
Sadly, in some cases you can just declare an abatement on the value of improvements you made to the property by making restorations, not on the whole value of the house. In other words, you would pay real estate tax on the value of the house prior to you making additions or renovations. Then you would get a tax break on the rest.
How Tax Abatement Programs Work?
Tax abatement programs may get rid of or reduce the property tax owners pay on new construction, rehab and/or major improvements. Keep in mind, you'll still need to pay taxes on the value of the property before it was improved. However, the cost savings can be significant. For instance, let’s say the tax abatement program in your municipality states property owners could save roughly $225 a month, or about $2,700 a year, for a total cost savings of $27,000 over 10 years. Without the tax abatement, you might spend about $3,700 a year in property taxes; with it, you may spend about $1,000 a year.
The easiest method to discover if there are any property tax abatement programs in the area where you wish to purchase is to look up property tax abatement programs in your city. For example, the city of Houston, Texas created a tax abatement program that encourages new growth, new development, and new jobs. These tax abatements attempt to strengthen Houston’s existing competitive advantages, while augmenting Houston’s emerging markets.
What projects qualify for tax abatements in the City of Houston, Texas for developers?
A developer builds in a declining part of Houston, a place where the project increases job opportunities, reduces poverty, or redevelops an area.
The rare situation when a developer requires a tax abatement to remain, expand, or locate, in Houston, a situation where Houston’s job and economic market is significantly strengthened by the developer’s presence.
A company invests in real estate that serves the public. Such an investment could provide affordable housing or rejuvenate a blighted area.
What project costs qualify for a tax abatement?
A developer improves their building or equipment
A developer improves or modernizes their site
The property is deteriorated or demolished, qualifying under section 44-132 of Ordinance 2014-0245
What project costs are unqualified for tax abatements?
Property that receives a historic site exemption
Land, inventory, supplies, tools, vehicles, vessels and aircrafts
Improvements that generate electrical energy not entirely consumed by the new development
Any improvements, including those to produce, store or distribute natural gas, fluids or gases, that are not integral to the operation of the facility
Is there anything else we should know about City of Houston, Texas tax abatements?
The lessor must be part of the tax abatement agreement if it involves leased property.
The City of Houston is highly interested in projects that also receive state economic or federal development funds.
Senior economic development officials meet with developers to discuss the tax abatement offer in the final stages of the tax abatement process
What are the requirements to receive a tax abatement?
A project must increase the value of their taxable property by at least $1,000,000.00 for deteriorated/demolished property or $5,000,000 for other development.
A project must retain or “create” at least 25 permanent jobs at the beginning of the tax abatement, continuing throughout the remaining years of the agreement.
The City of Houston must receive a detailed financial pro forma from the developer that explains all costs and projected revenue in line-item detail.
If the project site is located within a Texas Enterprise Zone (TEZ), the minimum investment requirements is $500,000 and the project must create five permanent jobs.
How does the city of Houston, TX determine the terms of an abatement?
The City decides how many years a tax abatement should last based on the impact the project creates for the City.
What happens if the developer doesn't meet tax abatement terms?
The City of Houston will recapture taxes abated if the developer defaults on the agreement.
Prospective Drawbacks of Buying an Owner Occupied Tax Abated Property
Tax abatement lowers your property taxes-- how could saving all the money while getting to live in a new or just recently rehabbed property potentially have any downsides? Well, there are a few things that might go wrong.
A significant concern is that tax abated homes are often in less preferable neighborhoods. The tax abatement is a reward to encourage people to move and redevelop into these locations. Whether revitalization efforts will eventually show effective is a big question mark. If the neighborhood doesn't enhance, your property worth could stay flat or even decrease, which might make it hard for you to sell and perhaps cause you to lose a great deal of cash.
If you continue to reside in the house past completion of the tax abatement period, you'll experience a considerable jump in your annual housing expenditures. It's vital that you watch on this deadline and prepare for the boost, so you'll be able to manage it when the time comes. If you sell the property after the tax abatement period ends, you may have to reduce your asking rate to represent the boost in taxes.
Likewise, tax abatement doesn't provide you complete certainty over what you'll spend on property taxes. Even during the abatement period, your tax bill could alter. Given that you're still paying tax on a portion of your property's value, a change in the tax rate or a unique assessment could trigger your property tax expense to increase. Because you're being taxed on a lower dollar amount and property taxes are based upon a portion of that amount, any increase most likely won't hit your budget too hard, but you should be aware of the possibility for an increase. Changes in tax rates or property might also cause your costs to decrease, which wouldn't be an issue.
Finally, the city might book the right to end your tax abatement if you become overdue on your property tax payments. Do not miss out on any if you're responsible for the payments. If your home mortgage company pays your taxes, watch your monthly statements carefully to make certain your tax costs get paid.
The Bottom Line
While property tax abatement is a fantastic reward to acquire a specific home, it should not be the deciding consider your purchase. Make sure you actually want the property and are happy with the area. Having an additional couple hundred dollars a month in your bank account will not make you delighted if you dislike where you live. However, if you are in a position to purchase property as a developer, you may be able to significantly build long term wealth.