Getting in on the ground floor of a new condo with a 421a tax exemption program in place is like winning the lottery, but only for a limited time.
As some of the 10- to 25-year-long exemptions come close to running their course--putting a severe crimp in household budgets and resale prospects--the NY Times real estate section takes an in-depth look at what this means for buyers and sellers.
First, some background on the abatements, which came about to promote construction on underused land during the recent housing boom. Property taxes for units in a tax-abated building are negligible for the first two years. The taxes start inching up after that, however, and by the end, owners pay the same property tax as everyone else.
Some owners are already experiencing a rude awakening.
Here are some of key takeaways from the Times story:
- Property taxes don't necessarily go down along with property values, because NYC's arcane tax system determines property taxes based on what a similar rental building generates in income. Not only is the rental market hot right now, but this method of determining taxes usually produces a higher tax bill for condos versus co-ops, because the rental buildings used to determine condo taxes are newer and rarely have rent-regulated tenants.
- The higher your taxes go, the further your resale price falls
- The land itself isn't covered by the abatement program -- the city can and is raising assessments on the land to generate tax revenue.
- Tax assessments can be challenged, but the odds aren’t good: Of 47,000 requests for reassessment last year, the city offered to reduce taxes for only 15%.
- Don't trust the offering plan's predictions, because they are based on initial assessments of the land before construction is finished. Also, offering plans don't factor in increases in property tax rates that occur during the life of the abatement.
- Buyers and owners:
- Bottom line for buyers: Buy only what you can afford when the exemption expires.
Bottom line for buyers? Buy only what you can afford when the exemption expires. (For help determining the cost of the taxes when the exemption expires, check out this trick.)
Bottom line for owners: Don't wait three or four years to start protesting increases in tax assessments--do it now.