Luxury Real Estate with Sexy Tax Breaks

NEW YORK (MainStreet) — Buying a high end property doesn't always cost a fortune for the wealthy especially if there are tax breaks attached.

Property tax deductions and even exemptions exist for buyers of luxury properties under special incentives, such as New York City's J-51 and 421a program.

"A J-51 unit in a luxury building will likely sell for more than a comparable condo without a tax break, because monthly expenses are lower due to reduced property taxes. It's a deal but not dollar for dollar, and that's true everywhere you look for tax breaks in luxury properties," said David Reiss, professor of real estate law at Brooklyn Law School.

Benefits include no tax by reducing the assessed value of the property to the pre-renovated price and secondly by capping property taxes.

"These benefits phase out typically over a 14 year period for market rate properties," Reiss told MainStreet.

Most J-51 buildings in the borough of Manhattan are above 110 Street due to state restrictions.

For example, for interested buyers there's a two-bedroom J-51 condominum on West 140th Street available for $620,000 advertised on condo-living-west.com.

"The tax reduction will be priced into the cost of the home," said Reiss.

A back end strategy would be to buy and sell early rather than buy early and sell late to make a profit after purchase.

"Because the closer you are to the 14 year phase out when you sell, the less of a benefit the tax break is to the owners' sale price," Reiss said.

The 421a program is another tax break available for new construction not rehabilitation or conversion of existing buildings in Manhattan.

For example, an owner in a $90 million duplex penthouse in Midtown Manhattan would normally pay $230,000 in taxes without an abatement and $20,000 in taxes under an abatement program.

About 150,000 units in New York City receive partial tax exemptions under 421a.

The downside is that taxes gradually go up as the abatement is phased out.

Luxury buildings eligible for ten-year abatements include 157 W. 57th St., 30 Park Place and 516 Fifth Avenue.

For high end buyers willing to forego Fifth Avenue shopping in favor of jeans, fishing, skiing and other outdoor activities, Durango in Colorado's La Plata County offers tax breaks that are subsidized by natural gas companies such as British Petroleum. About 47% of the total 2012 property tax bill for La Plata County was paid by oil and gas companies.

"Because the county sits on natural gas reserves, the downside is the side effects of fracking, which include the possibility of water contamination," said Rick Lorenz, a member of the Luxury Home Marketing Institute. "But in the 36 years I've lived here, I've never known it to have happened. Fracking generally occurs in the Southeast quadrant of our county, which is less densely populated."

The number of luxury homes purchased in Durango increased from seven units during the first six months of 2012 to 17 units during the first six months of 2013, according to MLS statistics.

Up for grabs for $1.1 million is a 3,952-square-foot, four-bedroom/five-bath home on 35 acres with a $1,714 annual tax bill attached.

"Natural gas company subsidies have been as high as 61% but the price of natural gas has decreased recently," Lorenz said. "The tax break is based on the sale and production of natural gas, so when the price drops, it lowers the amount of tax subsidies the gas company pays."

Although it's a far cry from the hustle and bustle of New York City, Durango now has a direct flight from the Dallas/Fort Worth airport in Texas.

"Housing in Durango is underpriced compared to other parts of Colorado like Telluride, Vail and Aspen, which are nice but three times the price," said Lorenz. "The direct flight is a big help because Texas is a feeder market for Durango and so is Florida, Illinois and Phoenix."

Other counties in Colorado with generous natural gas tax breaks include Garfield and Weld.

--Writtn by Juliette Fairley for MainStreet

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