Obtaining Tax Abatements And Exemptions For Improvements Made To Real Estate In Philadelphia

The City of Philadelphia’s Office of Property Assessment administers what is commonly known as the contractor’s tax exemption program and also the tax abatement program.

How the Tax Benefits Work

Under the contractor’s tax exemption program, 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.

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 property improvements.

To illustrate, 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 1/2 years. Under the City’s current real estate tax program, the real estate savings will be well over $15,000.

Missteps Even Experienced Developers Make

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.

Many property owners fail to realize that the tax abatement program is actually divided into 3 separate and distinct application processes depending upon how the property is being used. What part of the 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.

Timing and Application Pitfalls

The time frame to apply for the contractor’s tax exemption and tax abatement programs differ. Some require the submission of the application to the City within 60 days from the date the building permit is issued, while others obligate the property owner to submit the application by December 31st of the year that the building permit is issued.

Furthemore, 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.

How the Programs Interact in Practice

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 the 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.

Why Legal Guidance Matters

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 makes sense for a property owner to engage legal counsel well before submitting a building permit application.