States and localities have adopted various types of tax incentives to encourage owners to preserve the affordability of subsidized and unsubsidized affordable rental homes. The examples below demonstrate how tax abatement has been implemented in jurisdictions across the country.
Preserving Affordable Housing
Class S and Class 9 programs, Cook County, Ill.
Illinois’ Class S program encourages owners of project-based Section 8 multifamily housing in high-cost markets to keep their units affordable by reducing the tax assessment by up to 33 percent. The Class 9 program offers a similar reduction to owners of unsubsidized properties who complete new construction or major rehabilitation of multifamily buildings and reserve 35 percent of the units as affordable. In 2001, Cook County extended the Class 9 program from only low-income census tracts to all areas of the county, an important strategy for encouraging mixed-income development. In 2008, to reduce incentives for converting rentals to condos, the county lowered the property tax assessment for apartment buildings from 26 percent to 20 percent, and to 16 percent in 2009. Each program is administered by the Cook County Assessor’s Office.
Housing Choice Voucher Tax Savings Program, Ill.
The Housing Choice Voucher Tax Savings Program encourages landlords to accept applicants holding vouchers by providing a 19-percent reduction in the equalized assessed value of units leased to voucher holders. In keeping with the program goals of promoting economic diversity and deconcentration of poverty, eligibility is limited to areas where the poverty level is below 10 percent, and landlords may only claim the tax abatement on the greater of (a) two units per property, or (b) 20 percent of all units. Several jurisdictions promote the program, including the City of Chicago, Cook County, and DuPage County.
J-51 Program, New York City, N.Y.
New York City’s J-51 Program provides real estate tax exemptions and abatements to multifamily buildings that are renovated or rehabilitated according to certain requirements. Between 1980 and 2007, these incentives spurred essential upgrades and system replacements for more than 2.4 million units. Property owners renovating their properties can generally receive a 34-year exemption from the higher real estate assessments resulting from the work if they agree to subject the renovated units to the city’s rent stabilization policy, which limits the annual rate at which rent can increase. These property owners can also receive a property tax abatement reducing existing taxes by a percentage of the cost of the renovations. According to the city, between 70,000 and 100,000 housing units are renovated under New York City’s J-51 Program each year.
Providing tax burden relief
District of Columbia
The District of Columbia offers several programs that provide real estate tax relief to local property owners faced with rising real estate tax bills. As of tax year 2016, tax abatements offered include:
- Owner-occupants who live in properties with fewer than six units may apply for the Homestead Deduction, which reduces the property’s assessed value by $71,400 before calculating the annual tax bill.
- Homeowners who receive the Homestead Deduction are also eligible for the Assessment Cap Credit, which limits increases in a property’s assessed value to 10 percent each year (the initial legislation set the cap at 25 percent; it was subsequently lowered to 12 percent before being reduced to 10 percent).
- Low-income households and nonprofit organizations are eligible for a five-year tax abatement which also exempts from recordation and transfer taxes for five years after the purchase of a home if the home is owner-occupied by a low-income owner and has a value of less than $356,000.
- Low-income homeowners may also be eligible for the Long-Term Homeowners Credit which applies to low-income homeowners who have lived in their home at least seven years, and already receive the homestead deduction .
- Using the Property Tax Deferral program, low-income households whose real estate tax bill has increased more than 10 percent from the previous year may be eligible to defer payment on the increment that exceeds the 10-percent increase.
Residential Act 42 Abatement, Pittsburgh, Penn.
In July 2007, Pittsburgh began offering this tax abatement to developers who rehabilitate existing residential units or build new housing in the city’s downtown or in one of 28 targeted neighborhoods. Qualifying developers receive a 10-year exemption from real estate taxes on the increased value of the property, up to a $250,000 cap.
Eligible neighborhoods were chosen on the basis of a “vitality index” score assigned by the city Planning Department. The index measured a variety of characteristics linked to neighborhood well-being, including the housing vacancy rate, violent crime levels and population decline. Tax abatements are designed to stimulate needed residential development in distressed areas that ranked in the bottom 50 percent of the vitality index scale.
Portland has a range of tax abatement programs designed to promote development near public transit stations, rehabilitation of rental homes, the construction or rehabilitation of owner-occupied homes in certain “opportunity areas” and nonprofit ownership of affordable rental homes. The three active programs (as of 2016) are the Non-Profit Low Income Housing Limited Tax Exemption, the Multiple-Unit Limited Tax Exemption, and the Homebuyer Opportunity Limited Tax Exemption.
As of fiscal year 2014-2015, almost 14,000 homes received one of these abatements, which totaled about $17.4 million. Almost 11,000 of these homes are in the Non-Profit Limited Tax Exemption program, which focuses specifically on giving tax abatements on properties providing homes to qualified tenants who earn 60 percent or below the area median family income.
421-A Program New York City, N.Y.
Since the early 1970s the 421-a program provided tax abatements of up to 25 years to spur development of residential apartments in New York City. Introduced at a time when the residential housing market was in dire straits, this program was an extremely effective stimulus for new development and has played a part in the construction of over 100,000 new units.
In the 1980s, inclusion of a modest share of affordable apartments was introduced as a condition for program eligibility, although this requirement applied only in some parts of Manhattan and the units could be built elsewhere in the City. Changes enacted in 2008, however, greatly expanded the areas in which an affordable housing set-aside is required to receive the tax break. Moreover, the changes required that the units must be built within the same buildings as market-rate units.
The program was allowed to expire in January 2016 due to an inability to reach agreement on guarantees of union-level wages for construction workers on buildings developed through the program. As of November 2016, a compromise appears to have been reached on the issue. The agreement must be approved by the legislature in order to the program to resume.
Non-Property Tax Exemptions
Nonprofit Sales Tax Exemption, Minnesota
In Minnesota, qualified nonprofit organizations benefit from a sales tax exemption that eliminates sales tax on construction materials and equipment used to build affordable rental and for-sale homes. In addition to new construction, the tax exemption also applies to materials used in the improvement or expansion of eligible affordable housing, including weatherization of homes for low-income households.