What co-op and condo boards need to know about NYC's new pied-à-terre tax
- Co-op boards will be tasked with collecting the new second-home surcharge
- Communication to affected non-resident shareholders can begin immediately
The Department of Finance will likely use the co-op and condo tax abatement to determine whether an apartment is a pied-à-terre.
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With New York City's pied-à-terre tax now on the books, co-op and condo boards are trying to make sense of its enforcement. For condo owners, the city will bill them directly. In co-ops, however, property taxes are paid through the maintenance so co-op boards will have to establish a process for collecting the tax.
The Department of Finance (DOF) will send out notices no later than August 30th identifying apartments that meet the criteria for the surcharge. During the law's initial phase, that generally means non-primary residences with a market value roughly equivalent to a $5 million apartment.
Read on for how your board can prepare to implement the tax.
What determines whether an apartment is a pied-à-terre?
DOF will likely use the co-op and condo tax abatement to determine whether an apartment is a pied-à-terre. This abatement is a tax break for primary residents. Theoretically, if the shareholder or unit owner is receiving the abatement, the apartment is their primary residence and the pied-à-terre tax would not apply.
“The city has already been rewarding people who have been using their homes as primary residences, now they’ll be punishing people who don’t,” said attorney Benjamin Williams, head of the property tax department at Rosenberg & Estis.
Can the determinations be challenged?
Condo owners and co-op shareholders can contest the determination that an apartment is a second home if it is a primary residence. A challenge needs to be made within 30 days from the notice date. “It is very time sensitive,” said attorney Parag Parekh, partner at Moritt Hock & Hamroff.
If the tax is contested, DOF will have to use additional information to determine whether the apartment is a primary residence. This might include voter registration as well as New York state and city income tax returns. Challenges about apartment valuations are typically made through the NYC Tax Commission.
How does the tax change over time?
During the first phase of the law, the city is not using actual sale prices. Instead, it is relying on DOF's existing market values for co-ops and condos, which are based on comparable rental buildings.
“This was originally done to help co-ops and condos because of concerns they were going to be overassessed using real world sales prices,” Williams said. As a result, a DOF market value of $1 million generally corresponds to a co-op or condo worth about $5 million on the open market.
“A property that has a $1 million market value pays about $55,000 in property tax right now,” Williams said. “The pied-à-terre tax for a $1 million market value apartment is 4 percent so that will add another $40,000, almost doubling the property tax.”
Beginning in 2028, the city will switch to using real-world market values for co-ops and condos. The tax will then apply only to units with a sales-based market value above $5 million. To do that, DOF will need to publish a separate tax assessment roll for co-ops and condos based on comparable sales rather than rental-based values.
"If you bought your apartment years ago, there may not be a recent sale for your unit," Williams said. "So the city will look at recent sales of comparable apartments in your building or similar buildings to determine its market value."
How will co-op shareholders pay the tax?
Condo owners will be billed directly, with tax notices sent to the individual unit owner. Co-ops, however, face a more complicated process because property taxes are paid through shareholders' monthly maintenance.
The board or managing agent will receive notices identifying which apartments are subject to the pied-à-terre tax and will have to notify the affected shareholders. "It's created another administrative burden for managing agents," Williams said.
Since the board pays the property tax bill, it will be the board’s responsibility to recoup the tax from the non-resident shareholders. If a shareholder fails to pay, there could be a range of other problems.
"The Department of Finance could place a lien on the entire co-op," Parekh said. That could make it much more difficult for buyers to secure financing in the building. "The board might also have to spend legal resources to resolve these issues," he added.
Parekh said his firm's position is that the surcharge should be treated as additional rent, giving the co-op the legal right to collect the charge from the shareholder.
What should co-op boards be doing to prepare?
For co-op boards it would make sense to prepare a schedule of the units and the number of shares in the corporation to identify which apartments are likely to exceed the $1 million threshold. The board can then begin communicating with any non-resident shareholders.
“You don’t have to wait for the notice to tell you if it’s your primary residence, you know,” Williams said. “Boards should be letting shareholders know what the surcharge will be so they can start planning and budgeting.”
Martha Stark, a clinical professor at the Robert F. Wagner Graduate School of Public Service at NYU and a former NYC finance commissioner, has developed a second home surcharge tool to help answer questions about whether the tax applies and what boards should do if there are uncertainties.
Boards should also be prepared for an uptick in sublet requests. Apartments rented for a full-lease term are exempt from the pied-à-terre tax, provided the tenant uses the unit as their primary residence.
"I've already seen co-op and condo leases with a rider stating, 'this is my primary residence,'" Parekh said.
Could the pied-à-terre tax spur property tax reform?
Beyond the surcharge itself, the law could mark the first step in a broader overhaul of how NYC values co-ops and condos for property tax purposes.
This issue has been debated for decades. A number of commissions have proposed changes, but none have been adopted. Frustrated by the lack of progress, Tax Equity Now New York sued the city, arguing the current property tax system unfairly shifts the burden onto owners in less affluent neighborhoods.
Unlike previous reform efforts, the pied-à-terre tax requires the city to begin creating a comparable-sales valuation system. For the purposes of the pied-à-terre tax, this only needs to be implemented for luxury apartments but it could be the foundation for future reform.
“If the intent is to accurately value co-ops and condos, you have to move towards a system that does this—and this is the first step,” Parekh said.
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