Everything You Ever Wanted To Know About The Philadelphia Tax Abatement
The Philadelphia tax abatement has been a hot topic of debate in recent news, and its increasing publicity has made it increasingly relevant for prospective buyers and current residents of Philadelphia.
We’ve compiled a comprehensive guide meant to answer any questions you might have about the history, specifics, and controversies of Philadelphia’s 10-year tax abatement.
What is the Philadelphia Tax Abatement?
If you make physical improvements on your home or on a piece of real estate in Philadelphia, you don’t have to pay taxes on the value of those improvements for ten years. It’s meant to incentivize new construction, improvement, and rehabilitation in Philadelphia by removing the cost of additional real estate taxes.
History of the Abatement
The tax abatement was passed in 1997, and has been in its current form since 2000. It was meant to incentivize development and significantly increase tax revenues and residential real estate through property improvements across the entire city.
It grew out of a similar 30-month abatement for developers in the 1970s that was put in place with the same goals of city-wide development after “decades of disinvestment, population loss and stagnant home-ownership rates.”
Last year, the city released a report analyzing the impact of the abatement and entertained various scenarios for how the city should proceed. According to the report, the abatement has at least had a significant role in increasing the tax base of the city since its enactment. Other factors have played a role, but the abatement has catalyzed development that otherwise may not have occurred that has led to increases in total tax revenue.
However, the abatement hasn’t applied its benefits evenly. Most of the abated properties are concentrated around the greater Center City area, despite its application to all Philadelphia zip codes. Many claim that the abatement confers an unfair advantage to developers and wealthy homeowners and investors. Activists have long stated that the abatement has deprived the city and school districts from needed revenue.
Recent public protests have led to both academic and political revisitations of the abatement. There is an ongoing public conversation focused on limiting or eliminating the program.
Property Tax Example For A Home With The Abatement
The abatement exempts additional taxes on the value of the improvement/structure, but you still pay taxes on the value of the land. For home improvement, the abatement exempts additional taxes on the value of the improvements.
Every home in Philadelphia is valued in 4 categories that when added together reflect the Market Value as determined by the Office of Property Assessment. Keep in mind, this may bear no resemblance to the actual sale price of the home.
The tax abatement applies to the last one - “exempt improvements.”
It can be a little bit confusing because the city refers to any home already standing as an “improvement.” In addition, you may make “improvements” to your home. It’s best to think about the value of the home in four parts: Taxable Land (the value of the land right now), Exempt Land (not applicable to most single family homeowners), Taxable Improvements (your home right now) and Exempt Improvements (any additions you make to the home). For a home built on a vacant lot, the entire new home can receive an abatement to be an Exempt Improvement.
Here’s a simplified example: Vacant Lot
Let’s say you own a vacant lot at a currently assessed land value of $25,000. You build a new home on it worth $400,000
Your taxable land value is $25,000. You will pay property taxes on this
Your exempt improvements value is $400,000. You will not pay property taxes on this
You may see increases to the value of your property’s land value and this would increase your property taxes
Here is a simplified version: Renovations To A Home
Let’s say you own a home that’s currently assessed at a land value of $50,000 that has “taxable improvements” (a home on the land) worth $150,000 for a total market value of $200,000.
You and your family choose to do renovations that end up increasing the value of the home by an assessed value of $75,000
Now your land is worth $50,000 and your property has a market value of $275,000
$150,000 of your home’s value is a Taxable Improvement and $75,000 of your home is an Exempt Improvement
Without the abatement, your property taxes would increase with that $75,000 increase in value to your home. With the abatement, the value of those $75,000 of improvements won’t be applied to the value of your home for real estate tax purposes for 10 years.
However, you may see increases in value to the property’s land (for instance if your neighborhood becomes nicer or the school district becomes better, increasing the value of your land). This increase in land value is not exempt or abated and would still apply to your assessed property value with respect to real estate taxes
Can’t Philadelphia just raise the land values of homes with the abatement to collect more property tax revenue?
Well, yes. And they do. Many homeowners who have the tax abatement feel that Philadelphia has pulled a bit of a “bait and switch” - offering them the abatement on their home’s improvements but dramatically raising their assessed land values, leading to dramatically increased property taxes. There is plenty of debate about this with some saying that Philadelphia has long undervalued land and it’s time to raise the values. Others side with homeowners who say it’s not fair to shoulder such sudden property tax increases to their land values when they thought they were getting a property tax discount for 10 years.
How can I find out if a home has an abatement?
You can use the City of Philadelphia’s property search tool to find information about any tax exemptions on a property, including abatements. A realtor should also be able to figure out if a home has an abatement on it. If a home has just been built, it may have a pending abatement.
How long does the abatement last?
The abatement lasts for 10 years.
Can I pass on an abatement to another buyer?
The abatement applies to a home even if the original owners sell the property. The remaining years of exemption apply to the property in the hands of the new owners.
For example, if you buy a home that has had the Philadelphia abatement on it for 5 years, you will benefit from the abatement for another 5 years.
If my home has an abatement, will I pay any property taxes?
Yes. You will pay property taxes on the assessed value of the land and any improvements (the home) that were present before the new exempt improvements were made.
Do all renovations or new construction automatically get the abatement?
No, you must apply for it. There are instances where homeowners or builders do not apply for the abatement even if building a new home or doing major renovations.
How can I get the abatement for my house?
You must complete an application for the abatement, which can be found on the Philadelphia Office of Property Assessment (OPA) abatements page, and present an approved building permit. You can’t be delinquent on your property taxes if you want to receive an abatement.
The OPA offers assistance to help with the application.
What is the controversy with the abatement?
Those who oppose the abatement claim that it robs the city and school districts of much needed tax revenue. They also cite data that shows that the abatement’s benefits haven’t applied evenly to the entire city, and claim that it disproportionately helps developers and wealthy individuals and investors.
What is the future of the abatement?
There is considerable debate between those who oppose the abatement and real estate industry advocates. The age of the policy as well as the implications for current and future tax revenues and city development have all contributed to discussions about the relevant of the current state of the abatement and how it has affected the city as a whole.
A report released in 2018 reassessed the abatement’s relevance and analyzed its impact on the city. Some high-profile city council members have introduced legislation meant to phase out and reform the abatement. It was a hot topic and topic of consideration for those running in the recent 2019 city primaries. Most of the candidates supported change, and voters agreed.
Ultimately, the future of the abatement is subject to the opinions of the City Council and the Mayor’s office.
What other property tax programs does Philadelphia have?
Longtime Owner Occupants Program (LOOP)
LOOP is meant to provide real estate tax relief for homeowners who saw a >50% increase in their property assessment (after the Homestead exemption) in the past year. There are income and length of ownership requirements, but the program can help to limit the amount that your home’s property assessment can increase as long as you are eligible even if your assessment increases again in the future. The program “locks in” the “LOOPed” assessment for as long as you remain eligible. A great example of how LOOP can help is provided on the program website.
If you end up becoming ineligible for LOOP, you must report that to the Department of Revenue using the LOOP removal form.
If you own property in Philadelphia and it’s your primary residence, the Homestead Exemption might save you a substantial amount on your real estate tax. The program expects that homeowners taking advantage of the exemption will save around “$620 a year” on their real estate tax bill.
The requirements are simple. As stated on the application, “A person must simply own the property and live in it as their primary residence. There are no other requirements.”
If you are eligible, the taxable portion of your property value is reduced. For the 2020 real estate tax bills, your property value will be reduced by $45,000 when assessed for real estate tax purposes. The exemption has changed from year to year.
You can apply either online, over the phone, or by mail. The applications, as noted on the application form, are due by September 13th to the Philadelphia department of revenue if you want to receive the Homestead tax credit in 2020.
Once your application is accepted, you don’t have to reapply for the exemption from year to year. As long as you continue to own and live in the eligible property, the exemption will apply.
You can’t enroll in both the LOOP and Homestead Exemption at the same time. Calculate the benefits from both programs before you decide which one to take advantage of.
Can you have the 10 Year Tax Abatement AND the Homestead exemption?
Following the passage of House Bill 391 by the Pennsylvania General Assembly, any taxpayer with a 10-year tax abatement applying to their property can’t get a Homestead exemption on their property from 2015 and beyond. You can cancel your abatement to become eligible for the Homestead exemption again.