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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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New York’s Potential New Pied-a-terre Tax and Expanded Real Estate Transfer Tax: Nuts and Bolts of the Proposed Law

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As reported here last month, a recent purchase of a $238 million apartment in New York City has re-sparked a debate among New York officials about taxing second homes owned by nonresidents.  As New York’s lawmakers look to finalize a budget by April 1st, and to find new ways to fund New York City’s subway system, the pied-a-terre tax is viewed as a new quill in the arsenal. (The Assembly Budget Proposal is A. 2009-B). 

However, the legislation, if enacted in its current form, appears to apply even to apartments owned by individuals who pay income tax to New York City as residents - - either because the individual is a statutory resident of New York City or the individual owns multiple properties, as well as to apartments owned by individuals who pay income tax to New York State who own second homes in New York City.  (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.)  Another proposed revenue source is an expanded real estate transfer tax on transfers of real property where the consideration paid for the transfer is $5M or more.  This new tax, as currently proposed, applies to both residential and commercial transfers.    

Pied-a-Terre Tax

The legislation creates a graduated tax surcharge that imposes a 0.5% to 4% yearly additional property tax on non-primary residence properties valued at $5M or more.   The tax would apply to class one properties (this includes one, two and three family residential units), excluding vacant land, and all other residential real property held in condominium or cooperative form of ownership, that has a market value of over $5M and is not the primary residence of the owner or owners of such property, or the primary residence of the parent or child of such owner or owners.

Proof of primary residence and the resident’s or residents’ relationship to the owner or owners will be through a certification as required by local law or rules promulgated by the applicable taxing authority.  The Assembly bill does not define the term “primary residence” nor clarify how the law will apply to real property where legal title to the property is held by a trust or other entity.  (Unlike legislation introduced in the Senate (Senate Bill S 44), which provides that the property will be deemed to be the primary residence of the owner, if such owner were eligible to receive or is currently receiving the STAR property tax exemption pursuant to Section 425 of the State’s Real Property Tax Law.)  The sliding scale tax applies as follows:

Market Value:                                   Tax Rate:
$5M to $6M                                       .5% of excess over $5M
Over $6M - $10M                            $5,000 plus 1% of the excess over $6M
Over $10M - $15M                           $45,000 plus 1.5% of excess over $10M
Over $15M - $20M                           $120,000 plus 2% over the excess over $15M
Over $20M - $25M                           $220,000 plus 3% of the excess over $20M
Over $25M                                       $370,000 plus 4% of the excess over $25M

If this legislation is enacted, a New York State resident, who owns property in New York City that is not the primary residence of such owner, or such owner’s parent or child, that has a market value in excess of $5M, will be subject to this tax.  We believe the definition of the term “primary residence” will be interpreted as the “domicile” of the property owner.  Accordingly, this legislation may apply even to those property owners who are taxed as statutory residents of New York City for personal income tax purposes and NYC residents who own residential real property within the statutory valuations that is not used as their primary residence, in addition to all nonresidents of New York City.   This web is much larger than the “out-of-state purchasers” to which this type of legislation is primarily directed. See justification to Senate Bill §44).  

Real Estate Transfer Tax

The Assembly’s bill proposes an additional New York State Real Estate Transfer tax on conveyances where the consideration “for the entire conveyance” is $5M or more.  This tax would apply in addition to the regular State tax that applies at a rate of 0.4%, plus the additional State “mansion tax” that is imposed at the rate of 1 percent of the consideration, where the consideration for the entire conveyance is $1M or more, and the transfer involves residential real property.  If enacted, the law would take effect April 1, 2019, but the tax would apply to conveyances occurring on or after thirty days after the law takes effect (May 1, 2019).  There is ambiguity as to whether this progressive transfer tax will apply to all real estate transfers (as currently drafted) or merely luxury residential properties.

The sliding scale tax applies as follows:

Consideration:                                  Tax Rate:
$5M - $10M                                        0.3%
Over $10M -$50M                              0.5%
Over $50M - $100M                           0.7%
Over $100M- $250M                          0.9%
Over $250M- $500M                          1.1%
Over $500M -$1B                               1.3%
Over $1B                                            1.5%

With the loss of the SALT deduction, the pied a terre tax will really hit home on some New York State and New York City residents who own real estate in New York City.  Stay tuned to see what passes!

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