Once again, that bad penny known as the pied-à-terre tax is back on the table in Albany. The controversial luxury surcharge on high-dollar, non-primary residences within New York State, originally proposed in 2013, has been rejected numerous times, in large part over questions of how co-ops, which pay a single tax bill, would handle the surcharge, which is supposed to apply to specific owners.
Sponsors of the bill now pending before the state Legislature – which was reintroduced as New York City faces a huge tax revenue shortfall due to the coronavirus pandemic – have come up with an answer that won’t make anyone happy: The burden will fall on co-op boards to collect the extra money from absentee shareholders and pass it along to the state, which will present an administrative nightmare for boards and managing agents alike. Meanwhile, the brokerage community is also up in arms, arguing that the proposed tax will have a devastating impact on the city’s already reeling real estate market.
“The legislation is so absurd, I don’t know where to begin,” says Stuart Saft, a partner at the law firm Holland & Knight, who co-founded the NYC Homeowners Coalition last November. The group was formed to speak on behalf of New York City homeowners. Their first action was to lobby against the bill, which calls for imposing an annual fee, beginning on July 1, 2021, that would range from 0.5% to 4% of the assessed market value above $5 million for one- to three-family non-primary residences, and 10% to 13.5% percent of the assessed value above $300,000 for condo and co-op units, which roughly correlates to a market value of $5 million, according to the convoluted calculations the city uses to levy property taxes.
“There are two problems here,” Saft says. “First, the assessed value for a co-op is a guess because their taxes are based on comparable rental buildings.” The second is how the city will determine unit value, since co-ops are not individually assessed.
“It seems they’re going to take the entire building value, divide it by the number of shares, and multiply each apartment by its allocated shares,” says Martha Stark, a former city finance commissioner who is one of the bill’s staunchest opponents. Even so, the $300,000 figure is “totally arbitrary,” she adds, pointing out that because assessed property values vary so widely, no one is exactly sure at what value the pied-à-terre tax would actually begin. “It could hit properties valued as little as $1.5 million,” Stark says.
Indeed, the surcharge could adversely affect co-op and condo owners who are far less wealthy than the millionaires – and billionaires – it supposedly targets. “A longtime New York resident whose apartment has appreciated in value over time, and who is now retired on a fixed income and living more than six months a year in Florida, will be taxed,” Saft says. “It doesn’t make any sense.”
Proponents of the bill claim that the mechanism is in place for determining residency. “New York City already has information about whether a property is used as a primary residence, like the New York City income tax, the co-op and condo tax abatement, the STAR property tax exemption and the Senior Citizen Homeowners’ Exemption,” says Sen. Brad Hoylman, the Manhattan Democrat who first introduced the bill. However, the legislation leaves the details of establishing primary residence – defined as spending at least 184 days in the city – to the Department of Finance (DOF).
“Problem is,” Saft says, “the DOF already makes so many mistakes in determining who is supposed to get the co-op and condo abatement.” What’s more, it appears the DOF could deem someone a nonresident even if he or she pays New York City income tax. “Short of sitting outside your house and monitoring you,” Stark says, “I don’t know how they would determine if you’re spending x amount of time here or at your second home in Westchester. But it seems they’ll make the determination and leave it up to you to prove otherwise.”
Yet another point of contention revolves around the responsibility placed on boards to collect the surcharge. Hoylman explains that the DOF would inform boards which owners and shareholders are being taxed, in the same way that information about eligibility for property tax rebates, abatements and exemptions is communicated. Boards would then pass along the tax charges to the targeted shareholders or unit-owners. But the fact is, Stark says, “the DOF has not been good about their data, and they’re not transparent with their information, which would allow errors to be corrected. And there’s not a lot of incentive for the DOF to correct them when you’re telling people their taxes are higher.”
That still leaves the question of whether the DOF will put a lien against the building and charge interest at 18% a year if the tax is not paid. “And what happens if the owners refuse to pay it?” Saft says. “Is the plan to have co-ops sue their shareholders? And who is going to reimburse the co-op for being the collection agent? Frankly, the lawyers for nonpayers are going to have a field day.”
Passing the Buck
Contesting the tax could also prove onerous for co-op and condo boards, though Sen. Hoylman says they would use the same process as challenging the city’s value assessment of a property.
Paul Korngold, a partner at the law firm Korngold Powers, says: “It seems the city is going to have to create this whole bureaucracy of challenge.”
The bill does allow for certain exemptions – if the apartment is the primary residence of a parent or child of the owner, for example, or if it is rented on a full-time basis to tenants who use it as their primary residence. “But who is supposed to file for exemptions, the co-op or the individual?” Korngold says. “You’re going to have a lot of people challenging the tax, and it’s not clear who is responsible.”
What’s more, it can often take years for buildings to get an adjustment through the services of a tax certiorari lawyer, which means added costs for co-ops and condos. “By and large, you’ve created a whole different level of compliance, and it will be up to managing agents to handle it,” says Carl Cesarano, a principal at the accounting firm Cesarano & Khan. “It’s already a mess with the co-op and condo abatements that managing agents are responsible for. If you throw this on top of them, I suspect they will want more money. And smaller companies, who might not have the capacity or infrastructure to deal with it, will tell buildings to hire an outside CPA or get an auditor involved. It’s going to be a hot potato.”
Opponents also doubt that the pied-à-terre tax will provide the revenue boon touted by its proponents. According to a city survey conducted in 2017, New York City had as many as 75,000 pied-à-terre apartments, which means the proposed tax could generate an estimated $665 million annually from co-ops and condos to subsidize city services. But a March 2020 study by Stark, who is now a professor at the Wagner School of Public Policy at New York University, found that the surcharge would raise only $91 to $170 million annually, which would barely make a dent in the state’s $14.5 billion budget gap.
Not surprisingly, the proposed tax has gotten fierce blowback from the business community, including the Real Estate Board of New York (REBNY), which argues that economic downturns are exactly the wrong time for tax hikes and would further weaken the luxury housing market. “I do realize that money has to be brought in to run the city,” says Steven Sladkus, a partner at the law firm of Schwartz Sladkus Reich Greenberg Atlas. “But taxes are already super high, which is why so many people were leaving New York City, even before COVID-19. The pied-à-terre tax really could have a chilling effect on the real estate market, which is already experiencing a major slump.”
Indeed, according to REBNY, a recent real estate analysis forecasts the pied-à-terre surcharge would lead to a loss of value of between 22% and 31% for apartments worth $4 million or more, with smaller declines for units under $4 million. “It will definitely affect sales prices at the high end,” Stark says. “If you have $6 million apartments dropping to $4.5 million, that means it’s actually going to make things more affordable for rich people.”
Critics are concerned that there may be other downsides to the surcharge. “If it inhibits the sales of higher-end properties, then the city is not going to get the mortgage taxes and transfer taxes,” Korngold says. “All of that money is going to disappear, so what’s their net gain? I can’t quantify it, but it’s certainly not as much as they think they’re going to get.”
For pied-à-terre tax opponents, the forecast looks grim. The legislation languished when Republicans controlled Albany, but now that Democrats have taken over the State Senate, the tax looks more likely to pass, in the view of Cesarano, the accountant: “You’ve got a majority that is basically of the opinion that people of high net worth should pick up the tab.”