Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York tax law.

A New Type of Pied-à-Terre Tax: A Surcharge on Non-Primary Owners

In a nutshell, as explained in the summary accompanying the Assembly Proposal, the legislation would “establish a progressive state tax on the owners of certain high-value secondary homes in New York City, consisting of a sliding tax rate, which is based on the type of real property and value of the home.”  For one, two, or three family residences, the tax would range from 0.5% to 4% of the property’s market value above $5 million.  For condominiums and cooperatives, the rate would range from 10% to 13.5% percent of the properties assessed value (or, for property held in cooperative form of ownership with an assessed value attributable to the tenant-stockholder’s percentage interest on a per unit basis) in excess of $300,000.  In contrast to the prior pied-à-terre tax proposals reviewed in this blog, the imposition of the tax would be on the owner of the property, versus on the property itself.   The tax would apply for fiscal years beginning on or after July 1, 2021, a few months from now!  So, for example, if Blake owns a one family home in Queens that has a five-year average market value of $6 million, and it is not the primary residence of Blake (or, Blake’s parents or child), then Blake would owe a surcharge of at least 0.5% and no more than 4% on the excess market value above $5 million (i.e., $1 million), so the annual surcharge would be at least $5,000 ($1 million x .05%) and no more than $80,000 ($1 million x 4%) depending on the rate structure chosen after enactment of the legislation.  If Blake owns a condominium apartment in Manhattan that is not his primary residence (or, Blake’s parents or child) with an assessed value of $490,000, (purchased in 2019 for approximately $6 million) then Blake would owe a surcharge of at least 10% and no more than 13.5% on the excess market value above $300,000 (i.e., $190,000), so the annual surcharge would be at least $19,000 ($190,000 x 10%) and no more than $25,650 ($190,000 x 13.5%).  If Blake owns shares of stock in a cooperative housing corporation located in Manhattan that is not his primary residence (or, Blake’s parents or child), then Blake would need to understand his total shares of stock in the corporation in relation to the total outstanding stock of the corporation, including that owned by the corporation.  Let’s assume Blake owns 960 shares of stock out of a total outstanding 111,640 shares of stock, which means his total proportionate ownership is .00860 and the assessed value of the building owned by the cooperative housing corporation is $52,540,000, so the assessed value attributable to Blake, as a tenant stockholder is $451,844.  Under these facts, Blake would owe an annual surcharge of at least 10% and no more than 13.5% on the excess market value above $300,000 (i.e. $151,844), so the surcharge would be at least $15,184 ($151,844 x 10%) and no more than $20,499 ($151,844 x 13.5%). 

In February of this year, in the current legislative session, Senator Holyman introduced Senate Bill S 4199 (the “Property Tax Pied-à-Terre Proposal”), which is essentially identical to Senate Bill S44B.  If you compare the Property Tax Pied-à-Terre Proposal with the Assembly Proposal, you see how different the two proposals are.  Since the Assembly’s Proposal institutes a tax on the owner, it creates a new article to the Tax Law, Article 30-C, entitled “Supplemental Surcharge on Owners of Certain Non-Primary Residential Properties.”  The Property Tax Pied-à-Terre Proposal, in contrast, simply amends the real property tax law, to impose an additional property tax.  One might think that it would be easier to impose a tax on the property itself, than to seek to impose a surcharge on owners that are non-primary residents.   In this regard, the collection, levy and lien provisions that are proposed as a part of Article 30-C involve special rules for issuing tax warrants against taxpayers who are not residents of New York State, that are dramatically different than other procedural rules set forth under the Tax Law, and appear to be problematic.  Moreover, it is not clear how the tax would apply if there were multiple owners or layers of ownership of a property, or, even who is an “owner,” as such term is not defined. 

What else has changed?  The Assembly Proposal eliminates a few of the exemptions found in the current Property Tax Pied-à-Terre Proposal.  For example, the Property Tax Pied-à-Terre Proposal exempts residential properties or dwelling units that are:  (1) the primary residence of at least one owner of the property or dwelling unit; (2) the primary residence of a parent or child of at least one owner of the property or dwelling unit; (3) held in condominium or cooperative form of ownership, where the owner has within the prior three-year period obtained an appraisal report showing that the residential property or dwelling unit has an appraised value of less than $5 million; and (4) rented on a full-time basis to a tenant or tenants for whom the property or dwelling unit is their primary residence.  The Assembly’s Proposal, in contrast, applies when the residence is not the primary residence of the owner or owners of the property (implying if there are multiple owners that the residence must be the primary residence of each of the owners), or the primary residence of the parent or child of such owner or owners, and to all non-primary residential owners of condominiums and cooperatives, where the assessed value is in excess of $300,000.

Out-of-state purchasers buying up high-end real estate in New York City that they rarely occupy or absentee owners who don’t live and work in New York City and do not pay New York City personal income taxes have been cited as the justifications for the Property Tax Pied-à-Terre Proposal.  However, as we have explained in the past, there are many individuals who own second homes in New York City, and such individuals do pay income taxes to New York City, either because the individual is a statutory resident of New York City or the individual owns multiple properties.  (As many readers of this blog know, an individual is taxed as a “statutory resident” of New York City if he/she maintains a permanent place of abode in New York City for substantially all of the year and is present in New York City in excess of 183 days.)  While the Property Tax Pied-à-Terre Proposal was structured to create enabling legislation, thereby authorizing localities to enact a local law implementing the tax, the Assembly Proposal, in contrast, is a state proposal, with the tax payable to New York State (not, New York City).   This makes the bill’s imposition even more difficult to justify from a policy perspective.  In addition, there are many apartments owned by individuals who currently pay income tax to New York State who own second homes in New York City.  As noted previously, when taking into account recent residency case law that does not often favor the taxpayer, it might also be considerably less expensive for owners to pay the new surcharge on their secondary residence than be subject to the income tax on all of their income, especially at the higher rates proposed in the Assembly Proposal! 

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