By Julian Domanico, Real Estate and Development Reporter
Have you heard about the “10 Year Tax Abatement?” It’s been much-discussed in Philly news and politics lately. Everything about the policy—from its effectiveness to the winners and losers—has been assessed. South Philly has been impacted greatly by the abatement which has fueled many developments over the last 20 years.
Originally enacted in 2000, the goal of the tax abatement program was to encourage development, add new housing in the city, and boost the local economy. How did it work? The abatement allowed residential property owners to avoid paying housing taxes for 10 years on the value of improvements related to new construction and rehabilitated properties. Put another way, newly-built housing stock that received the abatement from the City did not have to pay taxes for a decade on the new or rehabbed structure, only on the land under the buildings.
In 2022 this officially changed to a less developer-lenient scheme.
The change, in part, is due to rising property values. For the last 21 years, concurrent with the residential tax abatement program, residents in South Philly saw rising property value assessments. With rising assessments came an increase in taxes. Much of this was influenced by the new construction.
In some parts of the city, people felt the abatement spurred gentrification and unfairly benefited wealthy new homeowners. Others argued that the abatements hurt school funding which is based on property tax revenues. In response, Philadelphia City Council enacted changes in 2019 that would affect new residential development projects.
What’s the new deal?
Developers who apply for abatements on or after January 1, 2022, will receive a 100% real estate tax abatement in the first year, but the abatement will be reduced by 10% in each subsequent year (e.g., a 90% abatement in the second year, an 80% abatement in the third year, and so on), until the abatement expires at the end of the tenth year. Over ten years that means the total tax break is cut roughly in half compared to the old program.
Stay tuned to see how this shift will affect South Philly real estate and development in the future.