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Property Tax Proposal: A Road to Fairness?

The New York City Advisory Commission on Property Tax Reform has released its preliminary report on how property taxes should be calculated. The proposals represent a potential sea change for how co-ops and condos are taxed.

Currently, the Department of Finance goes through eight steps to figure out the tax liability for each property. It’s a byzantine system that originated with a 1975 court decision and took six years to implement. What emerged is a tax system consisting of four property classes with market value restrictions, different assessment ratios, year-over-year caps in growth, transition mechanisms, a complicated class share system and more. It’s a confusing picture for boards trying to make sense of the property tax numbers and prepare budgets for the upcoming year.

Additionally, many agree that the tax burden is inequitable.

The current proposals aim to simplify the system and make it more transparent, and fairer. To that end, the commission reached consensus on 10 initial recommendations. They are:
1    Move small rental buildings with up to 10 units and all cooperatives and condominiums into a new residential class along with one- to three-family homes. The property tax system would continue to consist of four classes of property: residential, large rentals, utilities, and commercial.
2    Use a sales-based methodology to value all properties in the residential class.
3    Assess every property in the residential class at its full market value.
4    Phase in annual market value changes in the new residential class over five years at a rate of 20 percent per year; eliminate Assessed Value Growth Caps.
5    Create a partial homestead exemption for primary-resident owners with income below a certain threshold. The exemption would be available to all eligible primary-resident owners in the residential class and would replace the current Co-op and Condo Tax Abatement.
6    Create a circuit breaker within the property tax system to lower the property tax burden on low-income primary-resident owners, based on the ratio of property tax to income.
7    Replace the current class share system with a system that prioritizes predictable and transparent tax rates for property owners. The new system would freeze the relationship of tax rates among the tax classes for five-year periods, after which time the city would conduct a mandated study to analyze if adjustments need to be made to maintain consistency in the share of taxes relative to fair market value borne by each tax class.
8    Maintain current valuation methods for properties not in the new residential class (rental buildings with more than 10 units, utilities, and commercial).
9    Transition to the new system gradually for current owners, with an immediate transition into the new system whenever a property in the new residential class is sold.
10    Institute comprehensive reviews of the property tax system every 10 years.
Yes, but…

There are a lot of unknowns, and the commission plans to schedule a second round of public hearings and meetings with stakeholders. For properties in the new residential class, the most important decisions are yet to come. Those deal with the fifth and sixth recommendations concerning owner income. “I’m telling you,” says Bob Friedrich, co-president of the Presidents Co-op and Condo Council, “as far as co-ops and condos are concerned, the key to this entire report is income. If that number is not set correctly, then you’re going to see significant tax increases to middle-class co-ops and condos.”

For owners who bought their apartments decades ago, the income discussion is particularly worrisome. That’s because the purchase prices were low back then. Flash forward four or five decades, and what once was valued at $50,000 might well be valued at $5 million today. But the owner’s income over this time span probably did not rise as much, and if the valuation system for property taxes does not take this into account, middle-class owners will not be able to afford to stay in their homes.

The commission has not set the income thresholds which would trigger partial exemptions, and it’s unclear how (although perhaps not in the commission’s purview) this could be implemented in a co-op, given its corporate structure. That said, most agree that the current property tax system is unfair and needs to be reformed. The road to fairness is lined with thousands of homeowners who will be at risk of being priced out of their homes due to unaffordable property taxes if these thresholds are set incorrectly.

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