You might have noticed a recurring trend in the area–houses being offered for sale with a tax credit.
The credit is a great incentive for a buyer, as it makes a more expensive property’s mortgage payment more affordable.
Here is how the tax incentive works:
Properties in an eligible historically designated districts, in which owners invest at least 25 percent of the current assessed value and follow some rather strict guidelines for upgrades are allowed a property assessment tax freeze for 10 years.
For example–you purchase a house for $100,000. At the time of the purchase, the annual taxes were $3,000. You invest $150,000 (well in excess of the necessary 25 percent) in improvements to the property, and sell the home for $350,000.
In most circumstances, when the new tax cycle comes around, the annual taxes would jump up substantially–say to $8,000–to better reflect the new value of the property. When a house has a CHAP tax credit, however, the annual taxes are frozen at the pre-renovation value, $3,000 in this example. That is an annual savings of $5,000, which translates to roughly $415 monthly savings on your mortgage payment.
This is a fantastic incentive for someone looking to purchase a home. If the buyer compares payments of two houses being sold at the same price, the one with the lower taxes becomes the more affordable option.
Per the city’s website, the CHAP tax credit program was started to “help the City in its mission to preserve Baltimore’s historic neighborhoods by encouraging property owners in these districts to complete substantive rehabilitation projects.”
The program has led to more than $5.6 million in investments in the Baltimore City.
There is no doubt in my mind that this program has helped neighborhoods with blighted properties by attracting new owners who take pride in their homes and the neighborhood as a whole.
The program gives builders more incentive to invest in our neighborhoods, because it increases their return on investment.
If an investor spends a total of $270,000 on the acquisition and subsequent renovations of a home, the tax credit allows him to net a higher dollar amount.
If a property is valued at $300,000, an investor would most likely lose money after he pays state transfer taxes, recording fees, real estate commissions and title fees. However, with the CHAP credit, he can do a high-end renovation and still make money, because a property with the credit typically sells for more than one without. The property could sell for $325,000 to $350,000, versus $300,000. Even with the increased initial payment, the buyer ends up with a monthly payment lower than that $300,000 property without the credit.
This is one reason you see neighborhoods like Canton just booming with renovation projects–there is money to be made!
By Mario Valone. Mario is a real estate agent with Berkshire Hathaway HomeServices Homesale Realty, 1500 Thames St., Unit C. He can be reached at firstname.lastname@example.org or 410-732-3030, and is happy to answer questions.