Tax abatement programs can be selectively offered in neighborhoods that have a large number of vacant, abandoned,  distressed or foreclosed properties in order to stimulate new construction of rental and owner homes and/or rehabilitation of existing homes. Some cities also offer targeted tax abatement programs to prompt new development or conversion of buildings to residential uses in downtown districts and other areas that have an inadequate supply of housing (or could accommodate additional residential growth).

Similar to tax increment financing, eligibility for these programs is limited to developers and property owners in designated zones and may be subject to the "but for" test, which ensures that the activity would not have occurred but for the abatement.

While the application of tax abatements in troubled or under- developed neighborhoods is primarily a community development strategy, to the extent that these benefits help to increase the overall supply of homes, the abatements may be associated with increased housing affordability. Tax abatements can be so successful in revitalizing some neighborhoods and spurring new market rate development, that overbuilding of market-rate apartment and condominiums can occur.  When combined with an economic downturn, this can lead to price reductions for apartments and condominiums that increase housing affordability but also threaten the financial viability of the market rate properties that now compete with developments that received tax abatements.  Some communities also include income eligibility limits (for homeowners) or agreements to rent to families with incomes below a specified level as conditions for receiving the abatement. These covenants may help to further expand housing opportunities for low- and moderate-income families. While the application of tax abatements in troubled or under-developed neighborhoods is primarily a community development strategy, to the extent that these benefits help to increase the overall supply of homes, the abatements may be associated with increased housing affordability. Tax abatements can be so successful in revitalizing some neighborhoods and spurring new market rate development, that overbuilding of market-rate apartment and condominiums can occur.  When combined with an economic downturn, this can lead to price reductions for apartments and condominiums that increase housing affordability but also threaten the financial viability of the market rate properties that now compete with developments that received tax abatements.  In Washington, DC, for example, several developers are retroactively requesting tax abatements on properties that were built as part of larger neighborhood revitalization strategies, highlighting the importance of carefully crafting the criteria for tax abatements, especially as it relates to the "but for" test to determine what development would and would not occur but for the tax abatements.  It also highlights the need to plan for the success and subsequent issues that this development tool can lead to. [1] Solutions in Action In July 2007, Pittsburgh PA began offering a tax abatement, known as the Residential Act 42 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 wellbeing, 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. Click here to visit the city's Finance Office site and learn more. View more examples of tax abatement policies for eligible new development in targeted areas.

The Village of Oakman Manor, Detroit MI -- Photo courtesy of Presbyterian Villages of Michigan Tax abatements that are offered to encourage rehabilitation of existing homes usually work by freezing the assessed value of the property at the pre-improvement level; property value increases resulting from repair or renovation are ignored during the tax abatement period. For example, if the owner of a home valued at $50,000 makes improvements that increase its market value by $30,000 to $80,000, the tax abatement will be placed on $30,000 of the new value of the home. The owner owes taxes only on the initial $50,000 for the duration of the abatement. When applied to new construction, developers and buyers typically pay real estate tax on the value of the land only; the added value of the improvement (the new home) is exempt from taxes for a specified length of time. In some cases, tax abatements also lower the rate at which real estate taxes are assessed. Learn more about the separate but related concept of split-rate taxation, under which land is taxed at a higher rate than structures on the land in order to encourage development.

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You are currently reading: Lower tax rates or reduce assessments for eligible new development in targeted neighborhoods Reduced tax rates or assessments can be offered as part of a community development strategy to promote new residential construction and rehabilitation of existing homes in revitalizing neighborhoods. Other pages in this section: Freeze real estate tax assessments to promote rehabilitation of existing homes To spur rehabilitation of aging residential rental units, communities can offer to abate real estate taxes for property owners who undertake substantial repairs. Freezing assessments at pre-improvement levels allows owners to recover their costs and helps prevent older housing units from deteriorating beyond repair. Limit real estate tax assessments for rent- and resale-restricted properties Rent- and resale-restricted properties are often assessed on the basis of their "highest and best use," without regard for the affordability requirements that limit earnings on these properties. Tax abatements can help make sure valuation of these properties reflects these limitations, helping the properties serve their affordable housing missions. Limit the rate by which real estate tax liability can increase In areas with rapidly escalating property values, communities may wish to limit real estate tax appreciation to help low- and moderate-income homeowners and those with fixed incomes stay in their homes. Click here to view other resources on tax abatements.

[1] "Donatelli Development, others request tax breaks for D.C. projects". By Jonathan O'Connell  Washington Business Journal, May 21, 2009.