Understanding the J-51 Tax Abatement

The PropertyClub Team
Apr 30th 2020
Today we're taking a look at the J-51 tax exemption and abatement program. Whether you're a developer or you're buying a property with a J-51 abatement, we'll go everything you need to know about this tax incentive.

The J-51 tax abatement program took effect in 1955 as a way to encourage building owners to install hot water plumbing in their properties. Since that time, the tax program has been extended. It now includes every significant capital improvement you could think of, such as major window replacements, roof repair, elevator upgrades, and replacement, electrical rewiring, plumbing overhauls, façade work, and sewer line repairs. In addition to landlords, the J-51 tax abatement is also available to developers who are converting industrial or commercial buildings to residential or converting rental buildings to co-op or condo.

In general, this tax reduction is often misunderstood by those who want to purchase properties. While it's true that the J-51 Tax abatement is relatively rare in condos and co-op apartments, listing agents find it difficult to give a detailed explanation of these tax benefits to potential buyers. In this article, we will discuss the meaning of the J-51 tax abatement and how to learn more about it on the NYC Department of Finance website. 

What is the J-51 Tax Abatement?

The J-51 tax abatement is an exclusive tax benefit given to some building owners. To be eligible for this benefit, you must have renovated your structure or plan to convert an industrial or commercial structure into a residential building. 

A J-51 abatement is a form of tax exemption that freezes the assessed value of your structure at the level before you started construction. It also decreases your property tax on a dollar for dollar basis. 

Overall, J-51 tax abatements reduce the assessed taxable value of your property while reducing the actual property tax on a dollar to dollar basis. 

According to HDP, here's what you enjoy when your property is granted J-51 tax abatement: 

  • Either a 34 year ( which comprises 30 years full and 4 years phase-out) or a 14 year (which consists of 10 years total and 4 years phase-out) exemption on a building from the increase in real estate taxes due to the construction work on your structure. Typically, affordable housing projects get 34 years exemption while other projects get 14 years.
  • Reduce the existing real estate taxes by about 8 ⅓ % or 12 ½% of the construction cost every year for the next 20 years. 

However, privately financed projects around Manhattan south of 110th, both co-ops and condominiums, tend to receive limited benefits, according to HPD. Take note of this the next time you are considering purchasing property around this area. 

What the above implies is that whenever you conduct a substantial upgrade on your property, it will get 34 years or 14 years exemption from increases in property taxes. Also, you will get a dollar to dollar reduction in your existing property taxes by about 12.5% of the upgrade cost for the next 20 years.

Don't forget that your building may not get the full credit for the actual cost of upgrading or renovation. The reason for this is because the city uses its own Certified Reasonable Cost (CRC) schedule to evaluate the cost/value of upgrading the building. Therefore, the tax abatement you are getting will be based on that evaluation; keep that in mind whenever you are carrying out a major renovation project on your building. 

Furthermore, your building may either get a tax exemption or abatement after renovation. This doesn't mean that you can't get a reduction and exemption altogether. To be eligible for both of them, you must have done an upgrade that significantly increased the assessed value of your property. 

How Did the J-51 Tax Abatement Come About?

The idea of J-51 abatement was born out of necessity. After World War II, there was a severe shortage of affordable rental housing. There, the New York legislature enacted Section 5-C of the New York Tax Law in 1946. 

The law granted tax benefits to homeowners who upgraded their vacant apartments and made them more habitable for people to live. Some of the apartments were so deplorable that they don't have modern indoor plumbing. 

In 1955, section 5 - h was added to the New York Tax law. The section allowed the New York City section J-41-2.4 of the city's Administrative Code. It granted tax benefits for the rehabilitation of existing and rundown buildings. 

Over time, the J-41 expands, and it covers the renovation of existing multi-family properties, even though they weren't deemed to be standard. In 1963, the expanded J-41 was renamed J-51 Tax Abatement. 

Due to the economic and housing problems in New York during the 70s, which resulted in the obsolete and vacancy of many commercial and industrial buildings, the J-51 Tax abatement was further expanded in 1976. The expansion allows the conversion of non-residential buildings into a multi-family residential building.

Furthermore, the 1976 expansion of the program allowed developers to take advantage of tax breaks and redevelop most buildings in New York that were desolate and unoccupied. 

Who benefits from the J-51 Program

The J-51 Tax abatement was initially enacted to grant benefits to owners of rental buildings. The essence was to encourage them to upgrade their properties. However, during the 70s, there was a spike of Condo and Co-op conversions in New York. This implies that buyers of the apartment enjoy the benefits of the program. 

When Does J-51 Tax Abatement on a Building Expire?

Don't forget that the J-51 tax abatement on a building isn't for a lifetime; it has an expiration date. So, whenever the full amount of the J-51 lifetime abatement is depleted or the maximum time limit of 20 years is exceeded, the J-51 program expires. 

Furthermore, the exemption on your property from an increase in real estate tax due to upgrades done expires after 14 years or 34 years. Generally, affordable housing projects get the 34 years exemption period while other projects get 14 years. And the last four years for both are phase-out periods.