Tax Incentives For Property Owners To Improve Their Properties
Written by: Alan Nochumson
If you are contemplating developing vacant land or rehabilitating an existing building structure located in the city of Philadelphia, there are a series of governmental programs that provide for substantial real estate tax relief to property owners who make such property improvements.
Philadelphia’s Office of Property Assessment administers what is commonly known as the contractor’s tax exemption program and also the tax abatement program.
CONTRACTOR’S TAX EXEMPTION PROGRAM
Under the contractor’s tax exemption program, which is codified under State Act 175 of 1984, as amended 72 P.S. § 5020-205, the property owner may obtain a real estate tax exemption for up to 30 months from the date the building permit is issued for the increase in the assessed value of the property due to the improvements being made to the property.
The contractor’s tax exemption program applies to property owners (i.e., developers) who are building or rehabbing a residential property that will be leased or sold. Application to the contractor’s tax exemption program must be made by Dec. 31 of the year that the building permit is issued.
Properties that are eligible under the contractor’s tax exemption program include a dwelling unit in a single house, duplex, triplex, townhouse, row house, or multi-family building.
The tax exemption under this governmental program begins on the first day of the month after the building permit is issued by the city of Philadelphia’s Department of Licenses and Inspections and concludes 30 months later or until the property is leased or sold, whichever comes first.
TAX ABATEMENT PROGRAM
The tax abatement program, on the other hand, provides for a real estate tax abatement for a period of 10 years for the increase in the property’s assessed value based upon the improvements made to the property.
Many property owners fail to realize that the tax abatement program is actually divided into three separate and distinct application processes depending upon how the property is being used—Section 19-1303(2) (Ordinance 961), 19-303(3) (Ordinance 1130) and 19-1303(4) (Ordinance 1456-A) of the Philadelphia Code.
What part of the tax abatement program a property owner should apply for depends upon whether the property is owner-occupied or an investment property, and, if the property is an investment property, whether the property is being rented or sold after the property improvements are completed, and, finally, whether the improvements to the property are being made to a vacant lot (i.e., new construction) or to an existing building structure.
Ordinance 961 offers a tax abatement in improvements made to existing residential building structures that will either be sold at the completion of the improvements or occupied by the property owner. Structures that contain one or more dwelling units are eligible for a tax abatement under Ordinance 961.
Under Ordinance 1130, property owners may obtain a tax abatement for improvements due to rehabilitation of a preexisting building structure or new construction of commercial, industrial and any other business properties, including rental residential properties. In other words, property owners who newly-build or improve existing commercial and industrial properties should apply for this governmental program.
Ordinance 1456-A provides for a tax abatement for new construction of residential properties that will be sold upon completion. A dwelling unit in a single house, duplex, townhouse, row house and multi-family building qualify for a tax abatement under Ordinance 1456-A.
The timeframe mandated by the Office of Property Assessment to apply for each of these tax abatement programs differ.
Both Ordinance 1130 and Ordinance 1456-A require the submission of the tax abatement application within 60 days from the date the building permit is issued, while, on the other hand, the property owner is “asked” to submit the application under Ordinance 961 by Dec. 31 of the year that the building permit is issued. The reason why I used the word “asked” when referencing the timeframe to apply for a tax abatement under Ordinance 961 is because that portion of the Philadelphia Code is admittedly ambiguous due to an obvious draftsman error. Since City Council has failed to cure this draftsman error over the years, the Office of Property Assessment has instead demanded that property owners who apply for a tax abatement under Ordinance 961 do so by Dec. 31 of the year the building permit is issued.
To illustrate the benefit of the tax abatement programs, if the property owner increases the property’s assessed value from $100,000 to $200,000 through improvements made to the property and, assuming the property owner is eligible for both the contractor’s tax exemption and tax abatement programs, that increase in the property’s assessed value will be exempt or abated from real estate taxation for up to 12-and-a-half years. Under the city’s current real estate tax program, the real estate savings will be well over $15,000.
LESSONS LEARNED
Over my years of practice, I have seen even the most experienced of real estate developers run afoul of the somewhat confusing, yet stringent, eligibility requirements for these governmental programs.
The biggest mistake I find is that property owners apply fail to realize that the tax abatement program is actually divided into three separate and distinct application processes depending upon how the property is being used. In doing so, some property owners apply for the wrong tax abatement and, thus, their tax abatement application is denied.
Furthermore, many property owners do not understand that they must separately apply for the contractor’s tax exemption and tax abatement programs. By failing to do so, they run the risk of losing a significant tax benefit because of how these programs interact with one another.
Under the tax abatement program, the 10-year tax abatement does not begin until the year following the completion of the property improvements.
For instance, if the property owner completes the property improvements this year, in 2014, the tax abatement on the property does not begin until 2015.
What happens in many circumstances is that the city reassesses the property soon after the improvements are completed. If the reassessment occurs in the middle of the year in which the improvements are completed, the increase in real estate taxes will not be abated for that year and, thus, the property owner will have to pay this real estate tax increase for the remainder of that year until the tax abatement goes into effect the following year.
That is where the contractor’s tax exemption program comes in. Since the city is prohibited from collecting any increases in real estate taxes for the first 30 months after the building permit is issued, assuming the property improvements are completed well in advance of the expiration of this 30-month period of time, the property owner, if eligible for the contractor’s tax exemption program, will not have to pay for any increases in the assessed value of the property.
Because applications to these governmental programs are promptly denied by the city if they are not filed in a timely basis and under the correct governmental program, it really does make sense for an attorney who represents a property owner in a construction project in Philadelphia to ask how the property owner intends to file for these governmental programs well before the property owner even submits a building permit application.
Reprinted with permission from the March 19, 2014 edition of The Legal Intelligencer © 2014 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.
