NYC 421a Tax Abatement – What it is and how you can benefit from it?

By: Abdullah Haroon August 9, 2020

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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.

How to know if your property qualifies the Criteria?

There are two areas that need to be covered.

  • 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 to deal. However, it’s not that simple a math. You will be paying less in favor of property tax but tax abatement is likely to cost more.  This is where you need to take a wise down and know how much it cost upfront?

A simple trick is to look at how beneficial the tax abatement is by weighing how much of an advantage you are likely to have. 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 find a property that has a 25-year term abatement and figure out 100% benefit in there as taxes are very 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 going to be extremely high, and in five years, abatement will expire.

In addition to it, the property will lose the price in resale as it will not be having low property taxes anymore.

To make things simple for you, 421a tax abatement is always better only if you know it inside out. You need to know how much you’ll be benefitting from it.

Summary:

  • The 421-a program is intended for investors in New York City.
  • The builders who construct multi-family housing on vacant spaces or underutilized.
  • It is applied to new constructions as well as multi-family apartments.
  • The modified multi-family housing falls under the J-51 tax exemption.
  • To qualify for the criteria of tax exemption, new development units have to be economical.


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 that have 300 residential units or more are subject to a 100% tax exemption. The duration extends to three years during construction. The developer has to pay the property taxes on the property which was paid before the exemption.

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.