Philadelphia Tax Abatement - 2021 Homebuyer’s Guide

If you’ve been reading about Philadelphia’s residential real estate market recently, you’ve likely seen lots of articles about Philadelphia's controversial 10-year tax abatement. It’s been a hot topic for many years. 

Love it or hate it, the tax abatements in Philadelphia have been a major driver of new real estate development across the city.

What is the Philadelphia Tax Abatement?

In essence, a residential tax abatement program is a reduction of a property tax bill levied by a municipality, typically to spur development of residential properties in specific neighborhoods or regions. 

Proponents argue that tax abatements create jobs, revitalize communities, and increase the tax base in a region. Critics suggest that the abatement causes rampant development which in turn causes long-term owners and residents to be pushed out of communities due to gentrification, rising property taxes, and increasing rents. 

Philadelphia enacted its 10-year property tax abatement program in 2000 and the city has seen steady new home starts and redevelopments in the 20 years since (the residential abatement program covers rehabs and new construction).

How Do Real Estate Taxes and Abatements in Philadelphia Actually Work?

In the City of Philadelphia, real estate taxes are levied on the total market value of a property, which includes both a land portion and an improvements portion. The land is given one value, and the improvements above the land — a home, if there is one, for example — are given a separate value. Cumulatively, the total market value amount is taxed at the rate of 1.3998% to arrive at the total taxes due for the year.

Philadelphia is continually updating (read, upping) its valuations for land and improvements, which has been the topic of debate recently, too. This is something to be aware of when purchasing a home with a tax abatement.

Property Taxes on a Philadelphia Home Without Abatement

 

In 2020, you’ll see that the land is valued at $30,315 and the improvements at $171,785. Together they add up to $202,100, which, when multiplied by 1.3998%, totals $2,829 in property taxes due for the year for this particular home.

Property Taxes on a Philadelphia New Construction Home With Abatement (Built in 2015)

 

Note that the improvement column remains at zero but look at what happens with the land value. It was raised by almost $110,000 in 2017! This translates to an annual taxable increase of over $1,500 — from $94 in 2016 annually to $1,632 in 2017. In percentage terms, that’s a 1,600% increase!

Of course, technically the property still has an abatement so there’s not much one can do to counter this except argue with the city that the valuation of the land is too high. Regardless, even with a giant percentage increase, the taxes due are generally reasonable given the value of the home. 

Are Real Estate Tax Abatements Fair to Long-Term Property Owners in Philadelphia?

Many, including Mayor Kenney himself, have suggested that the tax abatement is not fair. The argument is that it allows affluent buyers to get a tax break on their new residential construction while next-door neighbors have to pay taxes in full on their older homes. 

It all comes down to affordability. The average Philadelphian simply cannot afford to purchase a new construction home that offers an abatement.

That being said, Philadelphia does offer a program called Longtime Owner Occupants Program, or LOOP for short, for residents who have been in their homes for a number of years. While the tax breaks offered through this program aren’t as generous as abatement, it’s still effective in helping long-term homeowners cope with rising property taxes.

Are Tax Abatements Good for Philadelphia? 

Some studies have concluded that the tax abatement is a net gain for the city. After all, developers are building homes on empty land that would not otherwise produce income from property taxes. 

The construction boom also creates jobs for local workers, who can then use their paychecks to support the local economy.

There are other ancillary benefits to consider as well, such as transfer tax income to the city when the home is sold to a new buyer. Further, new developments might spur more people to move to Philadelphia from other parts of the country. If so, they, too, will contribute to the local economy; shopping for food or groceries, supporting local businesses, and paying state, wage, and local taxes. These are all things that strengthen a city.

What Are the Downsides to Philadelphia Tax Abatements?

Tax abatements can be viewed as unfair. The average homebuyer in Philadelphia cannot afford to buy a new home that offers an abatement as these properties usually trade well above the average home price for the city. 

Other critics have suggested that developers with little to no training might rush to build homes as quickly as possible to ride the development wave, while slacking on quality. Structural integrity is a real concern when buying a home, so it is always recommended to perform a home inspection, regardless of a building’s age. 

Finally, while the end result of new development modernizes the aesthetic of the city, living through the construction period can be difficult, to say the least. Flat tires from errant debris, noise complaints, and increased traffic due to closed roads are hassles that local Philly residents have had to endure over the past 20 years of building growth.

The Reduced Abatement in 2021

Tax abatement has fueled a surge of new construction and residential development across Philadelphia over the past 20 years, but will it continue?

Recently, due to increasing scrutiny over the fairness of the abatement, Mayor Jim Kenney signed a bill passed by city council members that will effectively cut the value of the abatement in half starting in 2021. As such, we anticipate more competition for homes with a tax abatement in 2020, before the benefit decreases.