What is the 421a tax abatement

If you’re in the market for a condo or a co-op in New York City, you might have heard of a 421a tax abatement. This is essentially a tax exemption that lowers the property taxes for a period of time, typically 10 years or more.

Wow, you may be thinking. The 421a seems highly alluring to home buyers, doesn’t it? However, as we’ve all learned, everything comes at a cost. There are several things you need to know before you run off and buy an NYC condo or co-op with a 421a tax abatement.

At Daisy, we believe in empowering owners, board members, and residents of buildings through technology and information to make the best decisions. We want people to live their best building lives – whether that means helping improve the building they currently live in, or helping ensure the next place they live is the best fit for them. So we’re sharing everything you need to know about buying a condo or co-op with the 421a tax abatement – how it works, its pros and cons, strategies for dealing with it, and what to expect. And we’ll also talk about other abatements you can research.

What is the 421a tax abatement and how does it work?

The 421a tax abatement is a program that lowers your property tax bill. It was created in the 1970s to encourage development and originally didn’t have any provisions for affordable housing. In the 1980s, new provisions required developments that wanted the exemption to either contribute financially to the construction of affordable housing or units targeted to different levels of income.

The program ended in January 2016, but in April 2017, the program was officially renewed and renamed “Affordable New York.”

Currently, the 421a is common throughout NYC, particularly in buildings that were constructed before 2008. Ten-year tax abatements are more common in new developments, while 25-year abatements are primarily located in Harlem and Upper Manhattan.

The 421a is administered by the New York City Department of Housing Preservation and Development (HPD) and is given to property developers in exchange for offering affordable housing. The abatement typically lasts anywhere from 10 to 25 years but also decreases over time. This means you can get a 100% tax exemption  – wow! – on property taxes for the first two years after construction, but it will drop to 80%, 60%, 40%, and 20% until you reach the end of the term.

However, as great as this sounds, you will find out the 421a does come with a “cost.” As a certain superhero once said, “With great power comes great responsibility.”

How do you know if a building has a 421a?

It’s pretty easy, simply go to the NYC Department of Finance’s website and enter the property’s:

  • Borough
  • Building number
  • Street
  • Apartment number

You’ll then be able to see the property’s profile. Click on “Benefits - Business & Construction” on the left and you will be able to see if the property has a 421a. If you want to see when the 421a expires, you can:

  • Make an estimate, based on the construction date. However, this may not be accurate.
  • Ask a verified buyer’s agent or broker, who can research this for you.

How many options does the 421a tax abatement have?

The 421a comes with only one option for condo/co-op buildings:

Option A
  • For rental housing developers who develop buildings with  more than six units but less than 300 units
  • 25% of the apartments within the building must be affordable housing
  • Projects under Option A can be financed with tax-exempt bonds or low-income tax credits
  • Full exemption period is 25 years, followed by a 10-year, phase-in period

Option B
  • For rental housing developers who build less than 300 units but more than six units
  • 30% of units must be affordable housing
  • Projects can be financed with any subsidy given by New York City
  • Full exemption period lasts 25 years, followed by a 10-year, phase-in period

Option C
  • For rental housing developers who build less than 300 units but more than six units anywhere below 96th Street in Manhattan
  • Other subsidies aren’t allowed for financing
  • Full exemption period lasts 25 years, followed by a 10-year, phase-in period

Option D
  • For homeownership developers who build less than 300 units but more than six units anywhere below 96th Street in Manhattan
  • Initial assessment value of the building must be $65,000 or less
  • Full exemption period lasts 14 years, followed by a six-year, phase-in period

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Option E
  • For rental housing developers who build less than 300 units but more than six units in New York’s “enhanced affordability” area, which includes certain areas of Queens, Brooklyn and Manhattan south of 96th Street
  • 25% of apartments must be income-targeted
  • Projects can be financed using tax-exempt bonds or low-income housing tax credits

Option F
  • For rental housing developers who build more than 300 units in New York’s “enhanced affordability” area
  • 30% of apartments must be income-targeted
  • Projects can use any subsidy offered by New York City

Option G
  • For rental housing developers who build more than 300 units in New York’s “enhanced affordability” area
  • 30% of apartments must be income-targeted
  • Projects can use any subsidy offered by New York City

Pros and cons of the 421a tax abatement

Despite how alluring it seems at first glance, the 421a comes with cons in addition to pros. Nothing is as easy as it seems, as we all know. Its pros, which are more immediately obvious, include:

  • Reduced property taxes for 10 to 25 years. This will make the condo or co-op more affordable in the short term since you will literally only pay pennies for the first 12 years of a 20-year abatement. However, for the rest of the term, the tax will jump 20% every two years. Yikes!
  • Higher resale value in the short term (e.g., one to five years). Since your condo or co-op has a tax break for the first part of the term, you can sell it for a higher price if it is sold before the tax starts increasing.

On the flip side, you need to watch out for the cons of a 421a, which include:

  • Rising tax amounts. Rising tax amounts may make it hard for you to pay off the property taxes, particularly if you experience unemployment or underemployment later on in the term.
  • Requires a strategic plan for resale. To make the most out of reselling your condo or co-op, you need to know (1) when the abatement started, (2) when it will expire, and (3) when the taxes will start increasing. If you don't sell your home during the abatement period, you'll have to sell it at a lower price point to compensate for the taxes. This would reduce the profit you make and you could possibly even lose money in the transaction - yikes! This is why you need to be very careful when buying a 421a condo or co-op. 
  • For example, let’s say you bought your condo during the second year of a 20-year tax abatement term. You should sell by year nine, 10, or 11, so the next buyer will be able to get the 421a benefits. However, if you sell by year 12, they won't get the benefits since the tax will start increasing 20% every two years beginning in year 12.

Strategies for dealing with the 421a tax abatement

Despite these cons, a 421a is still a good thing – if you’re okay with doing a moderate amount of planning and research. You just need to know how to play your cards right. Specifically, you need to know how much you can save and when to resell your condo or co-op.

That’s why you need to answer the following questions before deciding to buy a condo or co-op with a 421a:

  • What is the current selling price of the property?
  • When did the abatement term start?
  • When will it end?
  • How many more years do you have on your term until the taxes start increasing?

Based on these questions, you’ll be able to determine:

  • Whether you should buy the property.  
  • If you have very little time remaining before the tax hikes, it may not be a good idea to buy the property. Otherwise, the next buyer will not be able to enjoy the tax benefits, which means you won’t be able to get a higher resale price.
  • A good time to sell the property.
  • A reasonable resale price for the property.

Other Abatements

In addition to the 421a, there are many other tax abatements for New York condos and co-ops.

Cooperative and condominium property tax abatement

Also known as the co-op and condo tax abatement, the cooperative and condominium property tax abatement allows owners of a co-op or condo in New York City to reduce their property taxes from 28.1% to 17.5% depending on the average assessed value of the property.

This program is intended for co-op and condo owners that use their property as their primary residence (aka, where you live with your family). This means you aren’t eligible for this abatement if you purchased your co-op or condo as an investment property.

You must also meet the following requirements:

  • You must own three or fewer units in a building
  • You can’t be receiving a 421a, 421b, 421g, 420c, or J-51 abatement
  • Your property can’t be owned by a trust or corporation
  • Your property can’t be in a Housing Development Fund Corporation (HDFC) building
  • You must have purchased the unit before January 5th to be eligible for that tax year

Basic STAR and Enhanced STAR exemptions

Both forms of School Tax Relief (STAR) give owners of co-ops, condos, or houses in New York City property tax savings.

The basic version gives around $300 per year for property owners that have an annual household income of $250,000 or less. In contrast, the enhanced version provides property owners who are age 65 or older and have a yearly household income of $88,050 or less with property tax savings of around $650 per year.

J-51 tax abatement and exemption

This tax abatement is often misunderstood because it’s rare. It also sticks out for being a tax abatement and exemption – get this – at the same time! This is how it works: the tax exemption freezes the assessed value of the property at the level before construction or renovation began, while the tax abatement decreases property taxes.

Like the 421a, the J-51 was created to promote the development of affordable housing, particularly the conversion of commercial buildings into residential properties and the renovation of old residential spaces.

J-51 works differently depending on the building’s location and the type of improvements the developers will make.

Veteran, Clergy, and Good Samaritan exemptions

These exceptions are for property owners who are veterans of the United States military, members of the clergy, or good samaritans who became disabled during a crime or while preventing a crime.

Senior Citizen’s Homeowners’ Exemption (SCHE)

The SCHE gives owners of condos, co-ops, or houses in New York City who are age 65 or older and have an annual household income of $58,399 or less a reduction in property taxes of up to 50% on the assessed value of the property.

Eco-friendly abatements

There are two eco-friendly abatements in New York City: the green roof abatement and the solar roof abatement. Both are intended for property owners who want to go green.

Green roof abatement

The green roof abatement is for property owners who want to install green roofs on their units. As defined by the NYC Department of Finance, a green roof has vegetation that provides insulation, absorbs rainwater, and combats the “heat island effect,” which refers to when urban areas have higher temperatures than surrounding areas.

Limited to the lesser of $100,000 or the property taxes due in that year, the abatement has a rate of $4.50 per square foot of the area considered “green roof.”

Solar roof abatement

This abatement is for properties that use solar panels on the roof. New York City’s Department of Buildings is responsible for determining eligibility, and properties currently receiving 421a, 421bv, or 421g abatements are not automatically ineligible.

For more New York City abatements, check out the NYC Department of Finance website. You can also dial 311 or contact your accountant to find out what benefits you’re entitled to.

Learn more about how to deal with New York City’s tax abatements

We know how confusing New York City’s tax abatements can be. Whether you’re looking at the 421a, the J-51, or eco-friendly abatements like the green roof and solar roof abatements, tax abatements can feel overwhelming.

At Daisy, we believe people live their best building lives when they’re connected to their neighbors, the simple things are easy and stress free. Part of that is financial health for both the building and the resident! Making informed financial decisions on your current and next home is integral in that. You can find more resources on condos and co-ops on our blog. And if you’re interested in improving your building life, visit our website!