Property Tax Incentives

Property Tax Incentives

Property tax incentives are designed to reduce the amount of property taxes that must be paid on real estate holdings. These incentives are typically offered at the state or local level, and they vary widely in terms of eligibility requirements and the amount of savings they offer. For example, some property tax incentives may be available only to owner-occupied properties, while others may be available to commercial or industrial properties.

Sales Tax Incentives

Sales tax incentives, on the other hand, are designed to either: reduce the amount of sales taxes that must be paid on goods and services related to real estate development or investment; redirect sales taxes to the benefit of the developer or retailer; or, in some instances increase the level of sales taxes, with some portion for the benefit of the developer or retailer. These incentives can take many forms, such as exemptions for construction materials, sales tax holidays for certain types of purchases, sales tax refunds for specific industries, redirection of sales taxes, or add-on taxes.

Income Tax Incentives

Income tax incentives are often used to entice employers to expand or retain their workforce, and are often part of a larger incentive or recruitment plan by governments to attract and retain key employers.

Understanding Tax Incentives for Profitability

Understanding tax incentives is crucial for real estate investors and developers because they can significantly impact the profitability of a project. By taking advantage of these incentives, investors and developers can reduce their costs and increase their returns. This article will be part of a series on tax incentives, with today’s focus on property tax incentives.

Property Tax Abatement Programs

These programs reduce or eliminate the amount of property tax homeowners pay on new construction, rehabilitation, and/or major improvements. The abatements will not completely eliminate your property tax bill—you’ll still have to pay taxes on the value of the property before it was improved. These programs are designed to attract buyers to locations with lower demand, such as city neighborhoods being revitalized 1. Examples of cities that offer property tax abatement programs include Cleveland, St. Louis, Portland, Philadelphia, and Des Moines. Each city has its own specific criteria and duration for the tax abatement 1.

Homestead Exemption

This is a property tax incentive that reduces the taxable value of your primary residence by a certain percentage. The exact amount varies by state and sometimes by county.

Senior Citizen Exemptions

Many states offer property tax exemptions to senior citizens who meet certain age and income requirements.

Disabled Veterans Exemptions

Disabled veterans may be eligible for property tax exemptions in some states.

Agricultural Exemptions

If you own farmland or other agricultural property, you may be eligible for property tax exemptions in some states.

Historic Preservation Exemptions

If you own a historic property that has been designated as such by your state or local government, you may be eligible for property tax exemptions.

Green Building Exemptions

Some states offer property tax exemptions for buildings that meet certain energy efficiency or environmental standards.

Community Reinvestment Zone (CRZ) Exemptions

CRZs are areas designated for economic development, and some states offer property tax exemptions for real estate investments in these zones.

Low-Income Housing Tax Credits

This federal tax incentive provides tax credits for investors in low-income housing projects, helping to offset the costs of developing affordable housing.

Brownfield Tax Incentives

These incentives are designed to encourage the cleanup and redevelopment of contaminated properties, and may include property tax exemptions or credits.

Solar Energy Property Tax Exemptions

Some states offer property tax exemptions for solar panels and other renewable energy systems installed on real estate.

Disabled Person Accessibility Exemptions

Some states offer property tax exemptions for modifications made to a home to make it accessible for a disabled person.

Economic Development Incentives

Many cities, counties, and states offer these incentives in an effort to spur economic development, thereby creating jobs, increasing sales taxes, reducing blight, increasing property taxes, and more.

Economic (Tax) Incentives

The proponents of these incentives contend that “but for” the incentives, the new project/development/jobs would not be created, while opponents contend that this is corporate greed at the expense of the public. This has been a contentious topic for many years and I have personally been in the middle of this “Border War” between Kansas and Missouri governments (noting that Kansas City has been a unique test case for decades).

Taking a deeper dive into economic development tax incentives is a worthwhile endeavor and is the primary focus as set out below. Note that these incentives (source: www.edckc.com) are for Missouri, but of course most states have similar incentives.

BUILD Program

The BUILD program is an incentive designed to reduce necessary infrastructure and equipment expenses if a project can demonstrate a need for funding. An eligible business must invest a minimum of $10 million appropriate to the necessary industry sectors and create a minimum of 500 jobs.

Chapter 100 Bonds

Chapter 100 bonds may be issued by the City to assist with the construction or rehabilitation of eligible commercial facilities or the acquisition of the equivalent. To affect property tax exemption, the City will take title ownership (at least temporarily) of the business assets therefore providing property (real and personal) and/or sales tax exemption for a set period of years (typically 25 years or less).

Chapter 353 Tax Abatement

Chapter 353 Tax Abatement (in Kansas City) is an incentive created to encourage the redevelopment of blighted areas by providing real property tax abatement and may be available for qualifying projects.

Enhanced Enterprise Zone

Designed to encourage job creation and investment, the Enhanced Enterprise Zone (EEZ) provides state tax credits and local property tax abatement to new or expanding businesses located within an Enhanced Enterprise Zone. Eligible businesses may receive a standard 50 percent property tax abatement for improvements made to real property for 10 years. A longer time period or greater percentage of abatement requires a financial analysis and approval by the EEZ Board and (Kansas City) City Council.

Land Clearance for Redevelopment Authority (LCRA)

The Land Clearance for Redevelopment Authority (LCRA) may issue a property tax abatement to assist in the removal of blight and blighting conditions within urban renewal areas, with the typical abatement lasting 10 years.

Opportunity Zones Program

The Opportunity Zones Program provides an incentive for investors to reinvest unrealized capital gains into Opportunity Funds in exchange for a temporary tax deferral and other benefits tied to long-term holdings. Noupfront subsidy is provided to investors; all incentives are linked to the duration of the qualified investment. The provision has two main tax incentives to encourage investment:

• Temporary deferral of inclusion in gross income for capital gains that are reinvested into Opportunity Funds.
  • Investors can roll existing capital gains into Opportunity Funds with no up-front tax bill.
  • If investors hold their Opportunity Fund investments for five years, the basis of their original investment is increased by 10 percent (meaning they will only owe taxes on 90 percent of the rolled-over capital gains.) If investors hold for seven years, the basis increases by a further five percent.
  • Investors can defer original tax bill until December 31, 2026, at the latest, or until they sell their Opportunity Zone investments, if earlier.
• Excludes from taxable income capital gains on Opportunity Fund investments held for at least 10 years.
• Zones are subject to approval by U.S. Department of Treasury.

Missouri Historic Preservation Tax Credits

The State of Missouri provides state tax credits equal to 25 percent of eligible expenses for the rehabilitation of approved commercial and residential redevelopment of historic structures.

Planned Industrial Expansion Authority (PIEA)

The Planned Industrial Expansion Authority (PIEA) provides incentives encouraging the investment and removal of blight and blighting conditions within PIEA Plan areas. This incentive typically provides up to 25 years of property tax abatement, often with the abatement level reduced after the first 10 years.

Federal New Market Tax Credits

Federal New Market Tax Credits (NMTC) may be available to eligible businesses providing non-traditional financing for capital investments made by businesses and for the development of mixed-use, commercial, industrial and housing projects in distressed areas.

Industrial Development Bonds

The Industrial Development Authority (IDA) of Kansas City, Missouri facilitates financing of eligible business projects through the issuance of industrial development bonds (IDBs). IDBs can be combined with other incentives such as Chapter 100 bonds and can lead to exemption from property taxes.

Tax Increment Financing (TIF)

Tax Increment Financing (TIF) is a financing tool that allows future real property taxes and other taxes (including sales taxes) generated by new development to pay for the cost of construction for public infrastructure and other improvements. This tool is designed to encourage development of blighted, substandard and economically underutilized areas that would not be developed without public assistance. TIF approval is subject to the “but for” test, meaning that the project is financially or otherwise infeasible except with the assistance of TIF.

Conclusion

Tax incentives can be a strategic way to increase the financial success of a project, and their use is a critical part of real estate investing and development. While the effectiveness of these incentives has been hotly debated and the results are mixed, these tools are likely here to stay. For real estate developers, it is advisable to evaluate if, when, and how you may be eligible for the myriad of incentives available.