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What is Abatement?

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Last editedJan 20213 min read

In simple terms, an abatement definition is a reduction in the tax that has to be paid by a person or a business. In some cases, it may be a complete exemption from the tax that would normally be paid, and examples of the form a tax abatement might take include the following:

  • A tax decrease

  • A tax rebate

  • A reduction in penalties that have to be paid

If you as an individual or a business that you represent have overpaid due taxes, or have been presented with a tax bill in excess of what it should have been, then you may have the right to ask for an abatement from the relevant authorities.  

How does abatement law work in practice?

Governments operating at a national and local level use abatement as part of their overall taxation policy. The aim is generally to encourage businesses and individuals to engage in specific types of activity, such as investing in research and development, or capital equipment. A tax abatement of this kind is normally referred to as a tax incentive.    

Tax abatement within real estate

One sector that makes more use of tax abatements than most is real estate. The details vary from city to city, with some cities establishing programs that reduce the property tax payments due on a home for a period of years and sometimes even decades. In some cities the tax in question will be eliminated completely rather than being reduced. 

What is the aim of real estate tax abatement?

When tax abatement is applied to a particular zone of a city the hope, on behalf of the authorities involved, is that this will increase demand in specific areas. In many cases, these will be parts of an inner city that have historically experienced lower demand but are now in the midst of a regeneration program.

How tax abatement is targeted

The targeting of real estate tax abatement varies – in some cases it covers the whole of a city, in others it applies to just a specific area of the city. The same variation applies to the status of the owners of the property. Some tax abatement programs are targeted at people in the low-to-medium income bracket, but the majority don’t have income restrictions of this kind attached.

In some cases, a property can be purchased with an abatement already applying, while other properties need to be improved to a specific degree before the process of applying for abatement can even begin.  

How much can tax abatement be worth?

In the majority of cases a tax abatement won’t be sufficient to cover the full amount of property tax due, but it could still generate savings that are well worth having. A reduction of $175 per month, for example, soon adds up to $2,100 a year and, for an abatement that is in place for a decade, a total saving of $21,000. Although the property will often have to be owner-occupied for a tax abatement to apply, the value of the abatement passes to the new owner if the property is sold. It should be noted, however, that the period covered by the abatement doesn’t “reset” when the property in question changes hands. If the original owner has enjoyed five years of a 10-year abatement, the new owner will receive the five years still remaining.  

Applying for an abatement 

If an individual thinks that the property tax they pay is based on a valuation which is too high, then they can apply for an abatement to their local tax assessor. In addition, in some parts of the country, tax abatement will be offered to owners who undertake improvements or restoration work on historic buildings in specific parts of a city.   

The downsides of tax abatement

Although paying less tax may sound like a win-win scenario, there are a few negative issues attached to property tax abatement:

  • The properties in question may be located in a less desirable part of a city

  • The hoped-for improvement in that part of the city may or may not materialize – if it doesn’t, the property may not increase in value

  • The end of the abatement period will see a sudden increase in the cost of owning the property

If you want to find out more about the pros and cons of tax abatement and how it might help your business then get in touch with our experts. As well as expert tax advice we can help you with ad hoc payments or recurring payments.

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