How to qualify for the DC Tax Abatement program

DC Tax Abatement

The DC Tax Abatement program is designed by the District of Columbia to help lower-income homeowners. Below are some often asked questions from agents and potential homebuyers. 

What does the DC Tax Abatement program entitle me to do?

Assuming you qualify, you are exempt from paying transfer and recordation taxes. This means not only are you exempt from the recordation tax; but customarily, the seller’s transfer tax is credited to you at settlement.  You will also be exempt from paying real property taxes for 5 years beginning the next full tax year after filing.  

What are the qualifying factors to get DC Tax Abatement?

The qualifying factors for DC Tax Abatement are as follows:

  • The purchase price of the property must be $456,000.00 or less;
  • The income threshold – max gross income – must be  

 PERSONS IN HOUSEHOLDS/INCOME LIMITS    

           1./$63,060

            2./$72,060

            3./$81,060

            4./$90,060

            5./$97,320

            6./$104,520

            7./$111,720

            8./$118,920

 

  • The property must be a principal residence; and
  • The purchaser must be domiciled in the District of Columbia.

 What does “domiciled” in the District of Columbia mean?

 To be domiciled in the District of Columbia you must (a) get a DC government issued ID such as a DC Driver’s license; (b) register to vote in DC; and (c) file DC Personal Income taxes.  Please note: the purchaser can obtain/do the above mentioned after the purchase.

What documents are required to get the Tax Abatement?

The documents usually required are:

  • Last 2 years income taxes;
  • Last 2 W-2s;
  • Last 2 paystubs.

If there are any extenuating circumstances i.e gaps in your employment, self-employment, etc., the District of Columbia may require additional documentation from you before approving the abatement application.

Who files the documents so I can get tax abatement?

The settlement agent files the required documents along with the settlement statement and sales contract when recording the deed after closing.

I am in the military, does my housing allowance count as income despite it being non-taxable income?  Do I need to change my State of Legal Residence?

Yes. The DC Recorder of Deeds looks at all sources of income, not just taxable income. 

Yes, you need to be domiciled in the District of Columbia which includes filing DC income taxes. You can fill out and file a form DD2058 to change your residency to the District of Columbia.

How do I know that my tax abatement application was approved?

The settlement company handling your closing will know immediately because your deed will go on record without transfer and recordation taxes. You will also receive a letter from the District of Columbia confirming that you qualified for the tax abatement and giving the years you will be exempt from property tax.

If I qualify for tax abatement, why is my lender still collecting taxes in escrow? 

The real property tax exemption does not start until the next full tax year.  In other words, if you settle in April 2018 and the tax period for 2018 is October 1, 2017, through September 30, 2018, you will not be given the exemption until the 2019 tax period. You will be required to pay real property taxes for April through September 2018. Your real property tax exemption will start 2019 and finish 2024.

 What happens if my situation changes – am I required to report it to the District?

The answer is Yes. If your household income increases or you decide to rent the property rather than using it as your principal residence, you must report it to the District. Until recently, nothing was specifically stated in the application.  The updated application now specifically states “If the household ceases to qualify for the Lower Income Homeownership Exemption, it is the responsibility of the owner to provide written notification to OTR’s Special Programs Unit within 30 days of the change in eligibility. Email specprog@dc.gov. This means individuals must keep up with the annual thresholds for the tax abatement program and self-report any changes. This also means individuals must notify the same unit if they are no longer living in the property as their principal residence. 

 If your questions about tax abatement have not been answered here, please feel free to contact me 202.362.1500 ext 1514. 

Hazard Insurance – If I change it, will it affect my mortgage?

If you are like everyone else, you have at least one New Years’ resolution.  Some choose weight loss, others fiscal awareness, other personal awareness, etc, etc.  If one of your resolutions is to lower your monthly costs and you are looking at changing your hazard / homeowner’s insurance, make sure you talk to your mortgage company.  

Why, you ask?  Well, you want to make sure you have enough insurance to meet the lender’s guidelines and the lender has notice of your insurer.  

What do you mean by "having enough insurance to meet the lender’s guidelines"?

If you change your insurance (lower your coverage), then there is a possibility you no longer have the amount of coverage required by your lender. Your lender is guided by the type of loan you have and specific guidelines provided to the bank either internally or by the government. You can contact your lender to get the list of requirements/guidelines for your coverage, so you can make sure you get the insurance that is best for your budget AND meet those requirements.

Why does it matter is I change insurance companies as long as I have the same or better coverage?  

In the documents you typically sign when getting a loan, there is typically a document stating you will keep your insurance intact and you will provide the lender proof of insurance – regardless of whether you have your insurance paid out of escrow or you pay the insurance directly. The lender will need to make sure the new company and the new policy meets the appropriate guidelines. The lender will also be checking to make sure it is listed on your policy as a mortgagee and the mortgagee clause is correct.

(Please note that the lender is focused on the fact that you are changing your insurance company. Does not matter if you are leaving your coverage the same, increasing coverage or decreasing coverage.)  

What happens if I do not contact the lender when I change to a new insurance company?  

The lender usually checks on insurance annually – whether you have a current policy and it has the appropriate coverage. If the lender checks in with the old company, it is likely the old company will report they no longer insure your property. When this happens and no new insurance company information has been provided to the lender, the lender will send a letter to you allowing you to provide proof of insurance. If you do not respond to this letter, the lender will put into place its own insurance – forced-place insurance is not easy to get removed.  

What is the bottom line?

When and if you change your hazard/homeowner’s insurance, call your lender to make sure those changes will not affect your loan servicing.

What does it mean when my DC property is classified as Class 3?

As a real property owner in the District of Columbia, the last thing you would ever want or need is for the Department of Consumer and Regulatory Affairs to classify your property as Class 3 – Vacant Real Property.

That's because the DC Office of Tax & Revenue assesses properties classified as vacant nearly six times the rate of a residential real property. So instead of paying $0.85 per $100 of assessed value, Class 3 property owners pay $5 per $100. (Still not as bad as a Class 4 or "blighted property" classification, which is assessed at $10 per $100.)

While the policy overall has helped the city clean up rundown houses and revitalize neighborhoods, occasionally it can lead to headaches for property owners such as someone who bought a fixer-upper that hasn't been occupied for some time.

Our office deals with these types of situations from time to time. Here are some examples of questions people call in with. If you have other questions, feel free to contact us. 

Click beyond the jump to continue reading the Q&A

Q&A: Do I really need a land survey?

Q. What is a location survey?

A. A location survey is a sketch or drawing that shows the boundaries of a particular property. Also, the survey typically includes the dimensions of the house, patio or any additions as well as the locations of fences and any easements or rights of way. Mortgage lenders generally require a survey before lending on a purchase transaction. However, if you are paying cash and not obtaining a loan, you can choose whether or not to obtain a survey. 

Q. Why should I want to obtain a location survey?

A. A location survey defines exactly what it is that you are buying. Just because the back yard has a fence, doesn’t mean that you own everything inside the fence (or that you might not own something outside it). Over the years we have seen many buyers surprised to find out that: 

  • they did not own the driveway, 
  • their house was over the property line, 
  • the neighbor’s fence was inside their yard, 
  • their fence was outside the property lines, 
  • half of what they thought was their back yard belonged to a neighbor,  
  • and countless other complicated scenarios.

Q. Doesn’t the legal description on the deed list the property being conveyed?

A. Yes, but legal descriptions are sometimes wrong. We have seen legal descriptions that have included public alleys and incorrect property dimensions. The survey helps as a check to make sure that the correct legal description is listed. When it is incorrect, a new description is prepared, with the help of the surveyor. 

Q. When do I get to look at a survey?

A. Federal Title & Escrow Company sends out the location survey to the buyers and the buyer’s agent as soon as it becomes available. This way you will have a chance to review it and you can address any issues and/or concerns prior to settlement. The closing attorney will also review the location survey with you again at the closing. 

Maryland’s Non-Resident Withholding Payment

* Editor's Note: As of 2016 the amount of tax required to be withheld is 7.5 percent of the "total payment" to a nonresident individual and 8.25 percent to a nonresident entity. For the most up-to-date information regarding Maryland withholding requirements, visit the Maryland comptroller website.

Sure, a seller would expect to pay various closing costs at the time of closing such as transfer taxes, real estate commissions, and settlement fees. But if you are a seller of a Maryland property, you may not be prepared for the possibility of an additional day of closing line item charge known as a non-resident withholding payment.

While the payment amount withheld is not the actual tax owed, Maryland law requires a non-resident seller of real property to remit an estimated payment to cover any possible tax implications incurred as a result of a gain on the sale. This means the settlement company will withhold 7.5% (or 8.25% if seller is a business entity) of a seller’s net proceeds (total payment) and remit the payment to the Comptroller of Maryland.

The following Q&A should help you determine whether a seller is subject to the requirements of the withholding payment:

Q: Is the seller exempt from the withholding payment?

A: If the seller can answer “YES” to one of the following questions then the seller will not be subject to the withholding payment:

  • Are you, the transferor (seller), a resident of the State of Maryland?
  • Although you, the transferor (seller), are no longer a resident of the State of Maryland, is this property your principal residence as defined in IRC 121 and recorded with the State Department of Assessments and Taxation?

Q: If the seller does not qualify for either of the exemptions, is it still possible to avoid or reduce the amount of the estimated withholding payment at the time of closing?

A: Yes. If the seller believes there is no capital gain on the sale or the capital gain is less than the amount required to be withheld (7.5% of total payment (net proceeds)), a nonresident transferor/seller can submit an Application for Certificate of Full or Partial Exemption (Form MW506AE) to the Comptroller requesting that the withholding amount be calculated based on the capital gain. However, the application must be received by the Comptroller no less than 21 days before the date of closing.

Q: If the seller is not exempt and is subject to the withholding, will the seller eventually receive a refund from Maryland for the withholding?

A: Maryland law requires a nonresident individual to file an end of the year income tax return for the year in which the sale occurred. The filing of this return will determine whether any gain has been realized on the property sale and the resulting tax liability (if any) will be paid from the withholding payment. Any balance remaining after deduction of the tax liability will be refunded from the withholding payment by the Comptroller of Maryland.

Q: What if, among multiple sellers (owners) of the same property, some are exempt while others are not?

A: The residence of the owners of the property will be determined separately. Withholding is required from each of the nonresident owners based on the total payment (net proceeds) that represents the ownership percentage of each of the nonresident individuals.

Q: If the seller is a non-resident personal representative of an estate, is the seller subject to the withholding requirements?

A: The personal representative is a fiduciary and acts on behalf of the estate. If the decedent was domiciled in the State of Maryland at the time of death, the personal representative (fiduciary) can declare as a resident of the State of Maryland and avoid the withholding requirements. The residence of the personal representative is not the determining factor.

Q: If the seller is a business entity, how is it determined whether the business entity is a resident or non-resident entity of the State of Maryland?

A: If the authorized representative for the entity can certify that the entity is qualified by or registered with Maryland Department of Assessments and Taxation to do business in Maryland, then the seller entity will be exempt from the withholding requirements.

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