With budget deficits looming as a result of the pandemic and a Democratic supermajority in the State Senate, a pied-à-terre tax, which would tax owners of second homes in New York City on an annual basis, is looking increasingly like it might become a reality.
Real estate taxes play a huge part in the New York economy and it’s very possible they will be used to plug the city's financial holes.
The most recent pied-à-terre tax proposal, which was ditched last year in favor of a scaled mansion tax, targeted owners of condos and co-ops with assessed values of $300,000 or more. Not surprisingly, brokers are fiercely opposed to a pied-à-terre tax, saying it will dent an already crippled market.
However, Democrats see their success at the polls last month as a validation of left-leaning policies. State Senator Brian Kavanagh, who chairs the housing committee, says New Yorkers can expect to see "ambitious progressive proposals" out of Albany next year.
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He points out that for years there have been generous tax breaks given to developers and passed on to owners through the 421-a and J51 tax abatement programs with arguably very limited public benefit.
"We’ve seen a lot of changes in the last two years and I expect we will see more. Tax policy as it relates to the real estate industry is an area where you are likely to see a very different approach," he says.
It’s possible a work-from-home culture and the rise of co-primary homes—where you're spending an equal amount of time in two places year-round—may complicate what is considered a pied-à-terre.
One of the biggest criticisms of the tax, however, is that it will bring prices down and lower the income generated by other real estate taxes like the transfer tax and mansion tax. Speaking on The Brick Underground Podcast, Jonathan Miller, CEO and president of the appraisal firm Miller Samuel, says the proposal is "catastrophic," would result in a net loss in tax revenue and ignores an important fact that tax policy changes human behavior. As evidence, he says when the scaled mansion tax was brought in last year there was a sharp drop in sales activity.
Miller also says the pied-à-terre tax would "collapse development" and the income generated from it.
It's a sentiment echoed by many in the real estate business. Becki Danchik is a broker with Warburg Realty, and says New Yorkers understand the need to raise money, but "by implementing an additional tax, it will only discourage people from investing in real estate here, and the city will lose more revenue than it could have gained from welcoming a part-time resident."
Gill Chowdhury, another Warburg Realty broker, says it's sellers who'll be the first to feel the consequence of a pied-à-terre tax. "The larger consequences will be to pile on supply onto an already hurting market, which will cause a drastic fall in prices over the coming years."
For his part, Kavanagh says he and his colleagues in the State Senate are open to all ideas from the real estate community.
"Short term we will have to do a broad tax package to increase revenue and then longer term we will have to evaluate all of these taxes and figure out what the public benefit is—in terms of affordability or sustainability or any other goals that are their ostensible purpose," he says.
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