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Philadelphia Set to Halve Tax Abatement

On December 2, 2019, Philadelphia’s City Council voted in favor of Council Bill No. 190944, which effectively cuts Philadelphia’s renown real estate tax abatement for new construction and renovations in half. The bill has been sent to the Mayor’s desk for signature, which is expected by the end of the month.

Under existing law, the real estate tax abatement granted homeowners tax relief for a period of ten years on the entire assessed improvement value of new and renovated home construction. The abatement has been controversial in recent years, with proponents crediting it for increased new home construction and economic development, and opponents deriding increased gentrification and tax breaks being granted to the wealthy.

The new legislation includes two changes designed to reduce the number of properties eligible for the abatement. The first change prohibits new residential construction built on vacant land from receiving an abatement. The second, and more broad reaching change, reduces the value of the tax abatement generally by applying the abatement to a fraction of the assessed improvement value, beginning with 100% of the assessed improvement value in year one and decreasing ten percent per year over the next ten years. This reduced abatement will apply to any abatement obtained after July 1, 2020.

Suppose a developer buys a “shell” house after July 1, 2020 for $50,000 and invests $100,000 in improving the existing property. The assessed value of the improvement is $100,000 for purposes of the real estate tax abatement. In year one of the abatement, 100% of the $100,000 assessed improvement value will be eligible for the tax abatement. In year two, 90% of the $100,000 assessed improvement value, or $90,000, will be eligible for the tax abatement. In year three, 80% will be eligible, and so on until in year ten only 10% of the assessed improvement value, $10,000, will be eligible for the abatement. As a result of this law change, half of the value of the tax abatement will be eliminated.

What does this law change mean for investors, developers, home buyers and home sellers? It may be time to re-evaluate your financial statement and understand all the tax aspects of living and working in Philadelphia. Contact us for a consultation and we can go over your individual circumstances.

The information provided herein should not be relied upon as legal advice. Your receipt of this information does not create an attorney-client relationship between you and Shmuel Law Group, LLC. Any advice provided herein should be discussed between you and your legal and tax advisers and applied to your individual circumstances prior to your acting on it. In certain jurisdictions, this publication may constitute attorney advertising.

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