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Advocate Says Pied-a-Terre Tax Would Hurt All Co-ops and Condos

Stuart Saft in Legal/Financial on February 6, 2020

New York City

Pied-a-terre tax, mansion tax, transfer taxes, Jeff Bezos, co-ops and condos.
Feb. 6, 2020

Last Friday, a group of activists led by State Senator Brad Hoylman, a Manhattan Democrat, gathered outside Amazon chief Jeff Bezos’s apartment building and demanded that he pay a pied-a-terre tax on his luxurious second home at 212 Fifth Avenue. Hoylman has long promoted a tax for owners of second homes worth more than $5 million, but the state legislature shot down the idea last year in favor of increases in transfer taxes and the so-called mansion tax. Hoylman says he plans to re-introduce the pied-a-terre tax. Stuart Saft, chairman of the Council of New York Cooperatives & Condominiums, has offered the following rebuttal to Hoylman’s plan:

Although the pied-a-terre (PAT) tax is described as a way to tax billionaires owning expensive second homes in New York City, the tax will affect all homeowners, including co-op shareholders, condo unit-owners, and single-family homeowners. This tax will apply to owners even if they have lived in their homes for years but decide to spend six months a year elsewhere. So it would also be payable by retirees whose homes have appreciated in value.

The PAT tax would also have the unintended consequence of placing a new tax burden on shareholders who live in co-ops where just one apartment is subject to the tax, including full-time residents who are neither billionaires nor millionaires. This is due to the fact that a tax cannot be placed on a single co-op apartment but only on the whole building, because there is only one tax lot for a co-op building. There is no method for the co-op to pass along the PAT tax to a single wealthy shareholder who uses the apartment as a second home because all costs in a co-op have to be based on relative shares. As a result, the co-op could lose its tax deductions because an argument could be made by the IRS that there would be two classes of shares, in violation of the Internal Revenue Code.

In order to determine if a home is subject to the PAT tax, the legislation would require the city’s Department of Finance (DOF) to create a new valuation system for co-op and condo apartments and single-family homes based on their market value. The proposal does not provide a way for homeowners to challenge the city’s estimate of a home’s value, nor has any thought been given to the cost to homeowners for reviewing the appraised value, determining the fair market value, then challenging the valuation and appealing the process. This cost would be high, and it would fall on the homeowner.

My understanding is that if this tax is enacted, the city would appraise every co-op and condo apartment and single-family home in order to create a database of homes worth more than $5 million. The city would then have to determine if the home is the owner’s primary residence. In essence co-op, condo and single-family homeowners would be subject to surveillance by the city government in order to enable the tax collectors to determine where the owner is sleeping. Worse still, the DOF would have an incentive to give high appraisals to every home in order to increase the number of homeowners subject to the PAT tax. An entire new bureaucracy would have to be established to monitor homeowners.

Regardless of how much revenue proponents of the PAT tax claim it would generate, the value of all homes would be reduced by a far greater amount because few people would buy a second home in New York City and subject themselves to a special tax. Furthermore, any time New York City or New York State was looking for additional tax revenue, the PAT tax rate could increase, or the amount of time owners would have to stay in their homes each year could increase.

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