Tax abatements are financial incentives local governments offer to stimulate development, revitalization or economic growth in designated areas. By providing investors with tax savings, they have the potential to lower project costs and enhance profitability. 

There are different types of tax abatements with varying criteria of eligibility, duration and advantages. Investors need to weigh the benefits of a tax abatement with any drawbacks, such as the impact on future property values and the effects on the local community. 

What is tax abatement? 

Typically, abatements take the form of a temporary reduction of taxes to encourage investment in real estate projects or improvements that contribute to the public good. By offering these financial benefits, governments hope to encourage private sector investment in construction, renovation and business expansion, leading to revitalized communities, increased employment opportunities and enhanced public services.  

Unlike property tax exemptions, which completely relieve the property owner of the obligation to pay taxes for a period, tax abatements reduce the tax liability. The distinction lies in the extent of the tax relief provided; exemptions offer full relief, whereas abatements offer partial relief. 

• Property tax abatement reduces tax based on criteria set by a local government, such as the type of property or development project. 

• Sales tax abatement reduces or eliminates sales tax on certain purchases. These are often related to construction materials or capital investments for new or expanding businesses. 

• Income tax abatement lowers income tax for businesses or individuals, usually based on investment or residency criteria. It is more common at the state than at the local level. 

Of these, state and local governments use property tax abatement most often to encourage development. 

How does property tax abatement work? 

The following is a simplified overview of the property tax abatement process. 

Applying for a property tax abatement 

Eligibility for a property tax abatement usually depends on the type of property, its location, and the intended improvements or usage. Requirements may include detailed plans for development and investment thresholds. In some cases, they may require commitments that benefit the community. 

Other considerations may also apply. Projects that meet specific environmental or social goals may receive higher priority, for example. Applicants must usually submit detailed documentation to local government bodies or special committees, who review the submissions based on established guidelines before approval. 

Duration and renewal conditions 

Depending on the project and local policies, durations can last from a few years or up to several decades. When the abatement ends, property owners will pay standard taxes again. 

Some property tax abatement programs allow for renewal or extension. The process typically requires a new application and proof that the property continues to meet the desired criteria. 

Calculating tax savings 

The main advantage of an abatement is a reduction in tax. The actual amount saved will depend on the property’s value and the area’s tax rate. The abatement will either reduce the amount on which the property is taxed or lower the tax rate. 

The savings can be substantial. However, it is important to remember that property values and tax rates can fluctuate. In other words, the actual savings may vary over time. Before applying for an abatement, property owners should carefully analyze the potential benefits and implications. 

Examples of tax abatement programs 

State and local governments implement tax abatement programs to spur investment, revitalize neighborhoods and support property owners. Each region has its own set of rules and benefits that reflect local priorities and needs. The specifics of each program depend on local goals, economic conditions and housing market dynamics. Local government websites or city development offices are generally the best sources of current and comprehensive guidance. 

Following are a few examples of these programs found across the United States: 

Las Vegas, Nevada 

Nevada offers several tax abatement programs for businesses, including a sales and use abatement and a modified business abatement. The Renewable Energy Tax Abatement program promotes renewable energy through partial tax abatements. The Nevada Governor’s Office of Economic Development offers other incentives targeting businesses such as data centers and aviation abatements. 

Cleveland, Ohio 

Cleveland’s revised residential tax abatement program encourages diverse neighborhood developments. It offers abatements for new construction and renovations, with single-family projects potentially getting 85% to 100% abatements, subject to caps. The program divides the city into areas with varying abatement percentages, aiming for equitable investment. Additionally, it mandates adherence to Cleveland’s Green Building Standard for environmentally sustainable construction and design practices. 

Portland, Oregon 

Portland’s tax abatement efforts aim to stimulate business and commercial developments while supporting sustainability. The Multiple-Unit Limited Tax Exemption (MULTE) caters to multi-unit projects with similar ten-year exemptions, based on affordability criteria. The Enterprise Zone (E-Zone) Program focuses on economic development, offering a five-year tax abatement for qualified new capital investments that significantly contribute to job creation and investment. Portland also offers the Downtown Business Incentive Credit Program. This program gives businesses a one-time, nonrefundable tax credit worth up to $250,000 to businesses that sign or renew leases in designated city neighborhoods. 

St. Louis, Missouri

St. Louis offers a tax abatement program that freezes real estate taxes at pre-development levels for a period of time and abates a portion of new taxes generated. St. Louis city and county offer several incentive programs. One of these is Chapter 353, which provides tax relief for up to 25 years and supports redevelopment in “blighted areas.” Chapter 100 tax abatements based on investment and job creation levels, including possible sales tax relief on construction materials. The Enhanced Enterprise Zone (EEZ) and other district-specific programs also contribute to the city and county’s economic development efforts. 

Benefits of buying abated property 

Tax abatements offer several advantages. Most obviously, they lower initial costs by reducing the property tax bills due on a commercial building. This can significantly lower the expenses for a new owner, especially in the initial years following the purchase. 

Tax abatements encourage the development of sought-after neighborhoods, leading to increased property values in those areas. Consequently, property owners often experience a higher return on investment. 

The economic benefits of buying abated property extend beyond the individual owner. Revitalizing neighborhoods attracts new residents and businesses, creating jobs and a more robust local economy. Once the tax abatement period expires, the enhanced property and surrounding area contribute to a broader tax base, supporting public services and community projects. 

Drawbacks of buying abated property 

While buying a property with tax abatement can be attractive, buyers should also consider the potential drawbacks. One of the main drawbacks is uncertainty about the future. Once the abatement period ends, the property taxes will revert to their full rate based on the property’s assessed value. If the property has appreciated in value or local tax rates have increased, that could be significantly higher than expected. Property owners who have not planned appropriately could face a steep increase in their property taxes.  

On the flip side, property values could fall. Many tax abatement programs target areas in need of economic revitalization. These areas may be less desirable due to factors like higher crime rates, lower-performing schools or a lack of amenities. If they fail to improve over time, the property value may stagnate or even decrease. 

Finally, buyers should be aware that tax abatement programs are subject to change based on local government policies and economic conditions. Changes in a program’s rules or the elimination of the abatement benefit can affect property values and tax advantages. 

Considerations for property buyers 

When considering purchasing a property with tax abatement, it is crucial to make an informed decision. Here are some key considerations for property buyers: 

1. Evaluate the terms and duration

Understand the specifics of the tax abatement attached to the property. This includes knowing how long the abatement lasts and what obligations might fall on you once it expires. The duration of tax abatements can vary significantly. The terms can dictate both how long they last and any conditions tied to maintaining the abatement. 

2. Research the local market and economic conditions 

Look into the local real estate market and broader economic conditions. Areas undergoing revitalization, which often benefit from tax abatements, can be excellent investment opportunities. However, assessing whether the local economy supports long-term growth and stability is important. 

3. Consult with real estate professionals and tax attorneys 

Before making a purchase, consulting with experts can provide critical insights. Real estate professionals familiar with tax abatements can help identify promising opportunities and potential pitfalls. Similarly, tax attorneys or tax advisors can advise on the implications of an abatement for your financial situation, helping you understand potential future tax liabilities. 

4. Consider the overall investment strategy and risk tolerance 

Consider how a tax-abated property fits your broader investment strategy and risk tolerance. Reduced tax obligation can improve cash flow and make an investment more appealing. However, it is essential to balance this against risks. Risks include higher taxes in the future, policy changes and the possibility that the area will become less desirable.  

Make the right tax abatement decisions with BPM 

When considering a tax abatement, it is essential to look beyond the immediate appeal of tax savings and consider the longer-term implications. By thoroughly researching and seeking professional advice, property investors can help ensure that their investment aligns with their financial goals and risk profile. 

BPM’s tax professionals can help you decide when to take advantage of a tax abatement opportunity. The ways we help include: 

• Analyzing specific terms and conditions. 
• Providing insight into immediate benefits and long-term considerations. 
• Assessing how the tax abatement aligns with your company’s overall tax strategy. 
• Forecasting future tax liabilities and obligations once the abatement period ends.

Contact us today to learn how we can help you make the right decisions about tax abatement.