This page has more information on concepts related to tax abatements, including:
as well as examples of different types of tax abatement programs., including those that:
The "But For" Test and Tax AbatementsThe
"but for" test is used in many localities to ensure that new
development or other activity that renders a property eligible for a
tax abatement would not have occurred
but for
the tax break. This standard is intended to ensure that the benefit is
applied only where necessary to stimulate needed development, and not
in cases where investment would have taken place anyway. The
determination is typically made by the agency administering the tax
abatement at the time it is approved, although specific procedures vary.
Critics of tax abatements and similar programs that result in forgone revenue, such as
tax-increment financing,
suggest that often the but-for test is applied too loosely or not
applied at all. In these instances, developers may receive a tax break
that deprives the jurisdiction of revenue and results in a project that
would have proceeded anyway.
Continue learning about freezing tax assessments to promote rehabilitation of existing homes.
Back to top
Split-rate TaxationConventional
property tax systems are designed so that structures and land are taxed
at the same rate. In contrast, split-rate (or two-rate) systems split
the assessment, applying a higher tax rate to land and a relatively
lower rate to structures on the land. The rationale for adopting this
form of taxation is to stimulate development and improvements to
existing structures, and penalize speculative property owners who leave
their lots unimproved. Proponents suggest that by discouraging owners
of unimproved or underdeveloped property from leaving their property
unimproved in the hopes that property values will rise substantially,
split-rate taxation may stabilize land values, increase urban
infill development, and reduce
sprawl.
Depending
on their home-rule status, communities may need statutory authorization
from the state before adopting a split-rate system, and so far only a
few jurisdictions in the United States have adopted this type of
system. The best recognized example of split-rate taxation is
Pittsburgh PA, where tax rates for land were at one point nearly 6
times greater than rates for buildings.
Click here to view additional resources on split-rate taxation.
Continue learning about lowering tax rates for eligible new development in targeted neighborhoods.
Back to top
Freeze Real Estate Tax Assessments to Promote Rehabilitation of Existing HomesIn
any given year, between 70,000 and 100,000 housing units are renovated
under New York City's J51 Program. The program provides real estate tax
exemptions and abatements to
multifamily buildings that are renovated or
rehabilitated
according to certain requirements. Buildings converted from lofts or
other nonresidential uses to residential use are also eligible.
Affordable housing projects generally qualify for a 34-year exemption
from the higher real estate taxes resulting from the improvement. The
tax break allows owners to recoup the costs of repairs. From fiscal
year 1980 to the end of 2006, these incentives spurred essential
upgrades and system replacements for more than 2.4 million units.
Click here for more information on the program.
-----
This example is taken, with permission, from Our Communities, Our Homes, a book by former HUD Secretaries Henry Cisneros and Jack Kemp, and Kent Colton and Nicolas Retsinas.
Continue learning about freezing tax assessments to promote rehabilitation of existing homes.
Back to top
Lower Tax Rates or Reduce Assessments for Eligible DevelopmentThe
Oregon Single Family New Construction Limited Tax Abatement (LTA)
program, authorized by state law in 1990, allows cities to abate
property taxes on the improvement value of newly constructed homes in
targeted neighborhoods that are purchased by income-eligible
homebuyers. Taxes on the assessed value of the improvements are abated
for a period of ten years, although the owner must still pay taxes on
the land. The LTA program enables cities to promote homeownership
without a direct general fund allocation or a reduction in tax revenue.
In distressed markets, the tax abatement program provides an incentive
for buyers to purchase in targeted neighborhoods.
Click here to learn more about tax abatements in Oregon.
-----
This example is taken, with permission, from Our Communities, Our Homes, book by former HUD Secretaries Henry Cisneros and Jack Kemp, and Kent Colton and Nicolas Retsinas.
Continue learning about lowering tax rates for eligible new development in targeted neighborhoods.
Back to top
Limit Real Estate Tax Assessments for Rent- and Resale-Restricted PropertiesIn
2002 the state of Illinois also created a special real estate tax
classification intended to preserve the availability of rental homes
made affordable through
project-based Section 8
contracts. The Class S incentive grants a lower real estate tax
assessment rate to the owners of multifamily rental properties who
renew project-based Section 8 contracts through HUD's Mark up to Market
program. In exchange for an agreement to participate in the Section 8
program for a five-year period, eligible units are taxed at only 16
percent of market value, a 52 percent reduction in the real estate tax
assessment level ordinarily applied to multifamily residential real
estate when the legislation was passed (33 percent).
Click here for more on the Class S incentive.
Resale-restricted
properties in the District of Columbia are subject to a special
assessment process under which taxes are calculated based on the amount
the current owner originally paid for the property, rather than its
assessed market value. The real estate tax assessment for properties in
this category is determined by (1) setting the base assessed value of
the property equal to the amount the current owner paid for it,
excluding
forgivable loans
and other assistance that is unlikely to be repaid; and (2) annually
adjusting the base assessed value for inflation using Bureau of Labor
Statistics figures for the area. To be eligible, properties must be
subject to resale restrictions imposed by either the United States or
DC government, or a tax-exempt organization, that limit resale to low-
or moderate-income buyers for a period of at least five years.
Click here for more information.
Continue learning about limiting tax assessments for rent- and resale-restricted properties.
Back to top
Limit the Rate by which Real Estate Tax Liability can IncreaseThrough
its Homeowner's Property Tax Credit program, the state of Maryland
helps low- and moderate-income homeowners manage rising real estate
taxes by limiting tax liability to a fixed percentage of household
income. When eligible households receive a tax bill that exceeds this
fixed percentage, the state will issue credits to pay for the
difference. Real estate tax limits are based on the following
percentages:
| Income | Tax Limit (percentage) |
| Up to $8,000 | 0 percent |
First additional $4,000
| 4 percent of additional income |
Second additional $4,000
| 6.5 percent of additional income |
| Additional income above $16,000 | 9 percent of additional income |
To
qualify for the program, combined gross household income and net worth
(not including the value of the property) cannot exceed a set
threshold. A retired worker who meets these qualifications and receives
monthly social security benefits of $1,000 ($12,000 each year) would be
responsible for up to $160 in annual real estate taxes (0% of the first
$8,000 and 4% of the first additional $4,000), and would receive a
credit on a tax bill exceeding that amount. In addition, some counties
in Maryland enhance the program by offering their own supplemental
credits.
Click here for more information about tax abatement and exemptions in Maryland.
Continue learning about policies that limit the rate by which tax liability can increase.
Back to top
