Tax Abatement (Explained: All You Need To Know)

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What is a tax abatement in simple terms?

How does it work?

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Tax Abatement Meaning

Tax abatement, or a tax holiday, means that a person’s tax obligations are reduced by a certain amount.

In other words, when your taxes are abated, it means that your taxes are lowered.

When you get a tax abatement, the government is essentially giving you a tax break on certain types of real estate property, business property, or even business opportunities. 

For example, if you have a real estate tax abatement, you are given a tax break or your taxes are lower in relation to a real estate property like a home, building, or any other type of real estate property for a certain period of time.

The government may offer you a tax abatement to stimulate economic activity, encourage certain types of investments, or encourage investments in a city or community.

In general, tax abatements are given for a fixed period of time after which the person or company’s taxation will go back to its normal state.

Property Tax Abatement

A property tax abatement is when there is a tax reduction on the tax obligation a person or company must pay in purchasing or owning property.

For example, the government may provide tax abatement programs to help companies invest in capital-intensive projects requiring that they spend a lot of money purchasing land, real estate property, or machinery.

You can consider a real estate tax abatement or personal property tax abatement as lowered taxes in owning real estate or personal property.

Tax Abatement Definition

How do you define tax abatement?

To understand the meaning of tax abatement, let’s first define the term abatement.

Investopedia defines an abatement as follows:

As you can see, an abatement is like a “reduction” or “decrease”.

Now, according to SmartAsset, a tax abatement is defined as follows:

This definition focuses on tax abatements relating to property tax incentives.

A tax abatement can be generally considered to be a reduction of taxes or a tax incentive given in certain situations to qualifying individuals or companies when doing a certain thing and for a certain period of time.

For example, you can have a property tax abatement when you are within the medium to low-income bracket and you are buying a home in a specific community.

How Does Tax Abatement Work

A tax abatement is when your tax obligations are reduced, and in some cases eliminated, for a certain period of time.

Typically, governments will offer tax abatements for a number of reasons, such as:

• Encourage a certain type of investment
• Encourage companies make capital-intensive investments 
• Reduce property tax on homes in certain cities or communities
• Attract buyers in low demand areas
• Encourage homeowners to make home improvements 
• Encourage companies in a certain industry to remain in the community 
• Develop economic activity 

In most cases, you are likely to see tax abatements in real estate helping individuals or businesses pay less taxes.

For example, a company may receive a 50% tax abatement for 20 years if it makes real estate investments in a certain community.

This means that the company’s property tax obligations are reduced by half for the next twenty years giving the company an incentive to invest.

Why Cities Offer Tax Abatements

The primary reason why cities offer tax abatements is to encourage local economic growth and stimulate their city’s economy.

A popular type of tax abatement is to attract property developers to develop in a particular area and then encourage home buyers to buy in that area.

This is particularly effective in neighborhoods and areas that have lower demand for houses such as in old sectors, vacant communities, or areas under distress.

To attract buyers and developers, the government uses tax abatement strategies to reduce the tax burden on companies and individuals in an effort to revitalize the selected neighborhood.

The government can also offer tax abatements to property owners to help them renovate their homes allowing them to increase the value of their property but pay property taxes on the value prior to the improvements.

This way, the government encourages property owners in older neighborhoods to renovate their homes helping improve the overall look and attractiveness of the area.

Pros And Cons of Tax Abatements

The main benefit for local governments to offer tax abatements on real estate property or personal property is to encourage more economic activity.

In essence, if the government is able to give tax breaks to encourage people to invest in a new home in a certain low-demand community, it may lose tax revenues by giving the tax abatement on the properties but it will possibly generate more revenues from higher economic activities in the community.

On the flip side, critics may argue that the governments may provide tax abatements to individuals and companies that do not really deserve it.

When someone who does not deserve a tax abatement receives a tax break, the community loses as the government will not have as much to fund schools, build the infrastructure, and invest in the community.

Tax Abatement Example

Let’s look at an example of tax abatement to better understand how it works.

Governments at different levels may offer tax abatements representing a form of government subsidy to encourage a certain business activity or the purchase of a certain type of property.

For example, a local government may offer a tax abatement on property taxes to encourage people and companies to buy real estate properties in a certain city or community.

The tax abatement can be given in the form of lower property taxes or even no property taxes for a certain period of time.

Tax abatements are also given to companies and small businesses to encourage them to stay in the community.

For example, a company can be encouraged to purchase a manufacturing plant by getting a tax abatement. 

Although the government may receive less taxes from the company, however, the company will help create jobs in the community providing a larger overall economic benefit to the government.

Tax Abatement FAQ

Let’s look at some frequently asked questions related to what’s a tax abatement.

What is property tax abatement

A property tax abatement refers to when the government provides a tax break, financial incentive, or tax subsidy, reducing the amount of taxes that you must pay on residential or commercial property.

In many cases, property tax abatements are offered by municipalities, local, state, or federal governments.

How does a tax abatement work

Tax holidays are usually given to help revitalize certain cities or communities or encourage investments in certain areas of the economy.

When taxation entities offer tax abatement programs, their objective may be to help low-income individuals to buy their first home, encourage small business activity, or stimulate local economic growth.

Who qualifies for tax abatement 

Depending on the type of incentive offered by the government, the qualification for tax abatements may vary.

For example, in some cases, property tax abatements are given to owner-occupied properties as opposed to real estate investors.

Also, to take advantage of tax abatement, in some cases the company or individual must apply for it (and possibly renew their eligibility on a regular basis).

For example, if tax abatement is given to a company to purchase a commercial building in a certain neighborhood in exchange for investing to improve the building, the company will only get the abatement if the building improvement is completed within a certain timeframe.

How to get a tax abatement

If you are looking for tax abatements, you can do a simple Internet search by typing keywords like “property tax abatement” or “small business tax abatement” along with the name of your city.

Your local government website should provide you with a list of different types of abatement programs that may be available to you.

When you find an abatement that may be suitable for you, you should still be careful in what you’re getting into.

Here are some tips for you to find the right abatement program for yourself or your company;

• Research the neighborhood or type of investment tax abatement is given to ensure that it fits your goals and overall plans
• Read the abatement terms to ensure that you remain in compliance and avoid unexpected tax liability 
• Be mindful of the duration of your tax abatement so you can financially be ready to pay taxes at the normal rates when the tax abatement period is over
• Make sure that you have the necessary financial budget to pay for the higher tax bills 
• Consider different options before choosing a specific tax abatement program

What is the difference between tax abatement and tax exemption

A tax abatement is when a taxpayer’s tax bill or tax liability is reduced (or even brought to zero) for a certain period of time and depending on various eligibility factors.

In other words, when a taxpayer is eligible for tax abatement, the taxpayer will get tax relief for a certain period of time.

When the tax abatement term is over or if the taxpayer no longer meets the ongoing eligibility criteria, the taxpayer will be charged the regular taxes.

On the other hand, tax exemption is when a taxpayer is exempt from paying taxes.

As a result, tax exemption means that the taxpayer benefits from a situation allowing it to be free from tax liability altogether.

For example, charitable organizations may be tax-exempt in certain situations.

This means that the charitable organization will not have any tax obligations to start with and so the notion of tax reduction or abatement will not even apply.

Tax Abatement Takeaways 

So, there you have it folks!

What is tax abatement in simple terms?

What does tax abatement mean in the first place?

A tax abatement is when government entities offer tax incentives to individuals and companies by reducing their tax liability in the context of specific programs.

For instance, a tax abatement may provide a tax incentive for a new home buyer to purchase a house.

Tax abatements, or tax bill reductions, can last anywhere between a few months to many years depending on the governmental abatement program.

If such programs exist, companies and individuals may apply for tax abatement to take advantage of the tax savings that they may get through the program.

A tax abatement can be given by the federal government, state government, counties, cities, municipalities, and local governments.

I hope I was able to answer your question related to what is a property tax abatement, what is a real estate tax abatement, and how does it work!

If you are looking to find tax abatements for yourself or your company, be sure to consult with a financial adviser or tax expert who may provide you with various possible options.

Good luck!

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Understanding Tax Abatement

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