As you expand your real estate portfolio to include multifamily units, it’s wise to look at ways to increase your net operating income by reducing costs. Tax abatement is one way to reduce out-of-pocket costs for the properties you own and rent.
Many of the programs and improvements that would qualify a multi-dwelling unit (MDU) for tax abatement are also good for the communities in which you invest. Adding amenities like performing arts centers, daycares, youth centers, and senior centers, which make apartments easier to rent at higher rates may qualify for tax abatement, are a win-win for investors, renters, and the community.
What Is Tax Abatement?
Tax abatement is a discount on your taxes realized when you make capital improvements to a property. Typically, when you update a property, the property taxes rise. But cities, towns, and municipalities incentivize some types of improvements–from energy efficiency to the creation of affordable housing–through tax abatement.
This allows for a discount on your taxes that offsets all or most of the increase. Investors sometimes have a choice of taking the discount upfront, on a declining scale over many years, or 100% abatement for a limited time, such as two or three years.
Centers for Public Use May Qualify for Tax Abatement
Multifamily buildings offer great opportunities to earn tax abatements for improvements that will appeal to tenants. Consider turning a common area into a performing arts center or a youth center to host activities for tenants and the surrounding community.
A multifamily building designed for adults 55+ could benefit from a senior center open to the building’s residents and other community members for events, activities, and even senior day care.
As more renters seek walkable communities, mixed-use property is becoming a smart investment. Commercially-zoned multifamily residential properties keep tenants close to shopping, restaurants, and health care facilities. A municipal public use facility within the mixed-use community can be the perfect addition to a blossoming downtown area.
Other Ways to Qualify for Tax Abatement
Be sure to do your research in the city in which you’re investing before planning capital improvements to an MDU. It could be even easier than you think to qualify for tax abatement.
In Iowa, for instance, the Mason City Urban Revitalization Tax Abatement program gives landlords tax abatement if improvements raise the value of the property by at least 15%. Participants can choose to take 100% abatement on the increased taxes resulting from the improvements for three years, or can take a declining scale abatement beginning at 80% of the tax increase over 10 years.
Similarly, the city of Tacoma, Washington, is offering tax abatement for investors who create multifamily housing in one of Tacoma’s 17 Mixed-Use Centers. Investors can take an eight- or 12-year abatement. In walkable communities on the verge of revitalization, these buildings provide a significant opportunity for investors.
As you choose your next multifamily investment property, seek out areas undergoing revitalization, where tax incentives can help reduce your overall costs and apartments can command higher than average rents for the region.
In addition to doing your research, you may wish to speak to a local lawyer or tax accountant to determine areas with the right tax programs for your goals as an investor.
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5 Arch Funding is not a tax advice expert, law firm or accounting firm. The content of this article is informational only and is not intended as tax, legal or accounting advice. Consult your own tax, legal or accounting professional for guidance.