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The Pied-a-Terre Tax on Pricey Second Homes Is Back on the Table

Paula Chin in Legal/Financial on February 23, 2021

New York State

Pied-a-terre tax, Billionaires' Row, co-op boards, revenue shortfall, COVID-19, tax the rich.

The proposed pied-à-terre tax is sure to get a chilly reception on Billionaires' Row and other pricey neighborhoods.

Feb. 23, 2021

Here's news that's sure to get a chilly reception on Billionaires' Row and other pricey New York City neighborhoods: 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. Meanwhile, the brokerage community is 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's 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 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 its taxes are based on comparable rental buildings.” The second problem is how the city will determine unit value, since co-op apartments 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).

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 Carl Cesarano, a principal at the accounting firm Cesarano & Khan: “You’ve got a majority that is basically of the opinion that people of high net worth should pick up the tab.”

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