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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 and multistate tax law. Noonan's Notes Blog is a winner of CreditDonkey's Best Tax Blogs Award 2017.

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A Pied-à-terre Tax in New York City?

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According to a recent New York Times article, hedge-fund billionaire Kenneth C. Griffin purchased a $238 million apartment in January 2019 located at 220 Central Park South, making it the most expensive residential sale in United States history. Even in Manhattan, where huge real estate sales are downright routine, Griffin, founder and chief executive of the global investment firm Citadel, has managed to set a new record on an unfinished piece of property,  a purchase that surpassed the cost of the next most expensive purchase by more than $100 million.

This news is also re-sparking a debate among New York State and New York City officials about a so called ”pied-à-terre” tax. Borrowing from the French and literally meaning "foot on ground," a pied-à-terre designates a small apartment, house, or room kept for occasional use. In essence, it is a small second home that is not the purchaser’s primary residence.

Large cities around the world have been grappling with how to make wealthy absentee property owners pay for the privilege of owning secondary residences. Sydney, Paris, and London have all recently added or increased taxes on the purchase of secondary homes.  In Hong Kong, non-permanent residents pay a 15% fee on the value of the home, and foreigners pay an additional 15% fee. Singapore has restrictions on the purchase of residential property by foreigners and a 15% tax. In Denmark, foreigners are required to obtain permission from the government to purchase secondary homes. Finally, while in Vancouver, Canada, where the greatest concentration of vacant properties is downtown, owners of empty residential properties are charged a 1% tax based on the assessed value.  The people most likely to be affected by the tax are the “international elite” who can afford it.

NY State Legislation

However, back here state-side, elected officials in New York have been previously less receptive to a pied-à-terre tax. The pied-à-terre bill, first introduced in 2014 by State Senator Brad Hoylman, a Democrat who represents some of the wealthiest neighborhoods in Manhattan, was blocked by the ruling Senate Republicans. However, Senate Democrats, now in charge say that they will discuss this legislation in conference.  The bill was introduced January 9, 2019 by Sens. Hoylman, Kennedy and Krueger, and a spokesman for the Assembly speaker says that the pied-à-terre tax legislation will be closely reviewed as part of the budget process. Gov. Andrew M. Cuomo is open to the tax as well.

How Would the Pied-à-terre Tax Work?

State Senator Hoylman’s legislation, Senate Bill S44, would create a sliding tax surcharge: For properties valued between $5 million and $6 million, a 0.5% surcharge would be added on the value over $5 million. Fees and a higher surcharge would apply to homes that sold for more than $6 million, topping out at a $370,000 fee and a 4% surcharge for homes valued at more than $25 million. A chart with the scale is available in the text of Senate Bill S44, which would become effective immediately upon passage. Stressing that this is an additional tax, the bill  excludes vacant land, but covers real property that has a market value of $5 million dollars or higher and [that] is not the primary residence of the owner or owners of such property, or not the primary residence of the parent or child of such owner or owners.    

The Office of the City Comptroller, Scott M. Stringer, estimated that a pied-à-terre tax would bring in a minimum of $650 million annually if enacted today.  Different concerned groups, such as The Partnership for New York City, a powerful business lobby, have varying ideas of where the tax proceeds should go.  Cities would have to enact regulations regarding the timing and collection mechanics of enforcing the tax.

Interplay with New York Residency Cases

One interesting subplot to all of this is how this potential new tax could affect the more basic residency issues that many of our clients with second homes in New York State or City often face.  Under New York’s residency rules, a taxpayer who maintains a permanent place of abode in New York and spends more than 183 days here can be taxed as a resident.  By definition, this residency test expands specifically to taxpayers who maintain their primary residence in another state.  But a whole other segment of our residency cases involve taxpayers who are claiming that they shifted their primary residence from New York State or City to another state, often a low tax or no tax state like Florida.  And in those cases, the focus is often on whether or not the taxpayer’s former home or apartment in New York still qualifies as their primary residence. 

To demonstrate that a taxpayer’s place is not their primary residence, taxpayers can take a number of different steps, including basic things like changing their driver’s license or registering to vote, and more nuanced (and more important) steps like shifting in business ties, time patterns, important possessions, etc.  In addition, we often find taxpayers can get tripped up by claiming residency-related benefits or exemptions in New York in the same time period they are claiming to have shifted their primary residence outside New York. Simple things like keeping a resident fishing-license, or resident status at a country club, or even an exemption from real property taxes applicable only to primary residents of the state often can be problematic.  Taxpayers who are claiming a change of primary residence outside New York but nonetheless still enjoy the benefit of these residency-related exemptions or discounts often are faced with the question: “Were you lying then or are you lying now?!” 

This pied-à-terre tax could raise another such circumstance.  You could imagine a situation where, to avoid this tax, a taxpayer would want to claim that their super-expensive New York City apartment is their primary residence to avoid the new tax.  But such taxpayers, if this law were to ever pass, should be careful to run the math.  It might be considerably less expensive for them to pay the pied-à-terre tax on their secondary residence than be subject to income tax on all of their income!  So this is something additional to watch out for and keep in mind if this tax becomes a reality. 

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