Property buyers in Manhattan, New York has always discussed the issue of buying in a new building which usually comes with a 421A tax abatement. The tax abatement basically means for the first 10 years, the new property owner will pay a discounted tax amount. The tax amount usually increases over 10 years to the full tax amount.
For example, if the full tax amount is $1000 per month, the owner of a new building may pay $100 per month the first two years, $200 per month the next two years etc.
The argument against buying in a new building is that the tax discount is just temporary and the owner will have a tax shock over the years as taxes increase. This while paying a premium for the new building. Today's New York Times article 421a Tax Exemption talks about this. The article cites monthly taxes increasing by 100% to 200% and owners trying to sell before the tax exemption expires.
As a property broker in New York and investor in numerous cities, my take is that it makes sense to buy in new buildings, pay the 10-15% premium for the new building and benefit from the tax advantage.
1. The tax discount in the initial years can go towards growing equity. The alternative is to buy in an old building where there is no discount at all. With the lower monthly taxes in a new building, the owner, assuming the same cash outflow, would be able to buy a more expensive property because with a more expensive property, the owner's equity would increase faster as well.
For example, assume taxes are $1000 in an old building and $200 in a new building. With the new building, the owner saves $800 in taxes and this is enough to support an extra (approx) $150,000 in mortgage. With a 10% appreciation per year in Manhattan property, the owner's equity would be an extra $15,000 the first year alone. Why not put the $800 into growing net worth instead of paying the government?
2. To the argument of taxes increasing 100% or 200%, I don't see the point to this argument. The alternative is to buy in an old building without a tax discount (abatement) and pay 10X or 20X the taxes from the beginning.
3. For investors, rental income will increase over the years, 5%-10% per year. Rental yields are much better in new buildings because in the first 10 years, taxes are lower. Hence over the life of the property ownership, rental yields will be better in a new building vs old because of the initial tax break in a new building.
Should an investor always buy in a new building? Answer is no. An investor should buy in a new building in a good location with strong rental demand. We need to compare apples-to-apples when comparing an old vs new building. Assuming an old building and a new building are next to each other, the rental yield and appreciation of the new building will be better than the old building.
Wei Min Tan in Managing Director of Castle Avenue Partners, focusing on foreign buyers interested in buying Manhattan, New York property. He has appeared on CNN, New York Times and the Wall Street Journal on the topic of foreign buyers of Manhattan property. Wei Min speaks Cantonese Chinese, Malaysian and conversational Mandarin. He can be reached at firstname.lastname@example.org