Tax Abatement

PROPERTY TAXES and ABATEMENT

Property taxes represent a major expense for most homeowners, typically amounting to approximately 2% of the home's value each year. This expense doesn't go away when you pay off the mortgage. Property taxes are a perpetual cost of home ownership. Some cities offer what's known as property tax abatement.

Tax abatement programs significantly reduce property taxes on a home for a limited number of years. The purpose of these programs is to attract buyers to specific locations for various reasons such as growth or revitalization. Some cities offer tax abatements citywide, while others only offer them in designated areas. These programs can bring homeowners significant savings, allowing them to buy more home for the same payment.

It is important to understand how tax abatement works, but always refer clients to the CITY that is offering the TAX ABATEMENT for more information regarding the abatement.

It is not FREE taxes. The homeowner still pays tax on the land and some of the improvements. Typically, it is a percentage of the value of the BUILDING that is abated.

Tax abatement is not making other property taxes higher. People often complain that “all those new houses with tax abatement mean I am paying higher taxes” and that is NOT the case. All those new houses will provide the city with more tax base eventually which should in effect keep the other homeowners taxes lower longer.

The abatement is being offered to entice development to the area CREATING more tax money not taking away from it. A farm field that was generating $500 in property taxes annually could eventually generate $350,000 or more in tax revenue.

Tax abatement needs to be APPLIED for and typically it is the responsibility of the HOMEOWNER not the seller or builder. BE SURE YOU ARE USING THE TAX ABATEMENT FORM in the new construction template on Dotloop or be prepared to get your checkbook out when your client calls you later on and says their tax abatement was never applied for and why didn’t YOU tell them what they needed to do.

Taxes are escrowed monthly and the homeowner needs to be sure the correct amount is being escrowed. If the mortgage company doesn’t escrow enough monthly and higher taxes are due the mortgage company will pay the amount due and then they will increase the monthly escrow amount until the homeowner is caught up. It is always a good idea for the homeowner to review their escrow amounts with their mortgage company 12-18 months before the end of the tax abatement.

Tax abatement means a young family with kids in daycare can probably afford a bigger house now and when their kids are in school (daycare expenses are over) and incomes rise they can afford the payment with full taxes. A retired person on a fixed income may not be able to afford this tax abated house when the abatement ends because their income may not increase and they won’t have an expense ending down the road such as daycare. THINK THROUGH THESE THINGS WITH YOUR CLIENTS so they are NOT set up for failure from the start.