UrbanDigs Logo

What is a 421a Tax Exemption Posted by Noah Rosenblatt in Buildings I Like, Buyer Tips & Tricks, Buying A Condo, New Developments, Tax Benefits

nyc real estate
A: The 421a Tax Exemption Certificate is a key financial resource used by developers and offered by the city to spur development and keep housing costs reasonable by offering ‘temporary relief’ in property taxes owed by individual condominium owners or coop shareholders. Although, most new developments in New York City today are either Condo’s or Condop’s, not Coops (see my post on What is A Condop?). By the way, isn’t that the perfect image for this post!
According to the NYC.gov website:

The Cooperative and Condominium Abatement Program provides partial tax relief for condo owners and co-op tenant-shareholders to reduce the disparity in property tax paid between residential Class 2 properties (i.e., condominiums and cooperatives) and Class 1 properties (i.e., one-, two-, and three-family homes), which are assessed at a lower percentage of market value.

There are also eligibility requirements:

Ownership — Condominium owners and cooperative tenant-shareholders who, as of the applicable taxable status date, may own no more than three dwelling units in any one property. Units held by sponsors or their successors in interest are not eligible.
Other Exemptions — Properties that already receive a state or local tax exemption or abatement, such as J-51, 421a, or 421b, may not be eligible.

Its important to note that tax abatements/exemptions are applied for by the developer and granted by the city to offer incentives to developers for building and marketing a new property. Usually, a 10-Year Tax Abatement is granted meaning that the actual property taxes that were assessed to the building and its individual units will get relief for the first 10 years of occupancy. The tax relief is the greatest right when the building is ready for occupancy and then increases every 2 years (20% every 2 years) until the 10 years is up, and at which time the property taxes will have hit their maturity.
Lets take a look at a real-life building for an example of the 421a Tax Abatement and the listings for sale in pre-construction:
205 East 59th New Development
nyc real estate
Apt. 9B
#Beds – 2
#Baths – 2
Total Size – 1,368 Sq. Ft.
Maint/CC – $1,626
*RE Taxes – $261
Asking: $2,211,000
Apt. 22A
#Beds – 1
#Baths – 1.5
Total Size – 1,122 Sq. Ft.
Maint/CC – $1,344
*RE Taxes – $216
Asking: $1,799,500
In this New Condo Development on 59th Street the 421a Tax Abatement brought the tax payments down to a very low $200+ for these 2 units. If I do the math and add 20% to this starting figure every 2 years for 10 years, I will reach a mature property tax value of about $650 for Apt. 9B and slightly less for Apt. 22A. So in this new development the 421a Tax Abatement is saving unit owners about $400/month or $5,000 a year for their first 2 years of living at 205 East 59th street.
I know its a bit confusing and that it could also be argued that with the temporary lower monthly expenses the developer is boosting the asking price, but in the end its still a luxury new condo with more amenities than most buildings offer; including:
24HR Doorman & Concierge
Private 5th Floor Landscaped Gardent Terrace
Fitness Center
Service Pantry for Catered Events
Outdoor Stretching Studio on Mahogany Deck For Yoga
A Whimsical Puppy Park
UrbanDigs Says: For investors who bought early in pre-construction at a good price point, it might be wise to sell your unit halfway into the tax abatement. The logic here is that you are selling the property while there is still tax relief in effect and the monthly expenses are lower than they will be in 5 more years; this should help you get a higher asking price assuming the market hasn’t experienced any turbulence. Always remember that as monthly expenses rise, the asking price must be reduced to compensate for affordability.