State Legislators Pass Pied-à-terre Tax on Second Homes in New York

The State of New York recently passed a new tax aimed at addressing New York City’s budget gap. The proposed pied-à-terre tax has been discussed for some time. While media reports have focused on properties owned by the wealthy, such as the penthouse owned by businessman Ken Griffin at 220 Central Park South, second residences can also be modest or mid-level residences used by those who commute, travel frequently to New York City, or reside part-time in the city. Gov. Kathy Hochul stated early on that the tax would raise approximately $500 million and potentially apply to thousands of homes.

How many homes and what tax impact?

A recent report from the New York City Comptroller, Mark Levine, addressed the estimates provided by Gov. Hochul. At issue are the criteria used to value the properties, the amount of tax to be assessed according to that value, and the process for verifying which properties qualify as second homes. Property values in New York City can vary significantly, and assessed values may have little bearing on property market value. Addressing these disparities, Levine noted, “We find that, before adjusting for these factors, our choice of tax rates and brackets could raise almost exactly $500 million from a little over 11,200 properties.”

What constitutes a second home in New York City?

The new tax will apply to pied-à-terre properties, defined as non-primary residences. In New York City, while a taxpayer may own multiple residences, only one is usually considered their domicile or primary residence. A primary residence is the location where an individual and their family primarily live and the address used on tax returns and official documents. A secondary residence for the purposes of this tax is one where an immediate family member is not living, or that is not leased to a primary resident of New York City, among other considerations.

How might the tax work going forward?

It is understood that New York City property valuations may not reflect the market value of properties in a standardized way. Recognizing the complications of property valuation, state lawmakers included provisions intended to ease the transition as valuation methods are updated.

According to CNBC, the tax will be phased in and apply to certain qualifying second homes based on their assessed value and property type. Properties meeting the applicable valuation thresholds will see a tax beginning at approximately 4% and rising to 6.5% for higher-valued properties.

By the 2028-2029 fiscal year, the city expects that its property valuations will be more in line with market value and based on sales of comparable properties. At that time, the tax rates are slated to proportionally decrease as market values are aligned.

Documentation of residency and property valuation will be important for owners of affected properties. Taxpayers who maintain multiple residences may face increased scrutiny regarding domicile, property use, and ownership structure. Questions may also arise regarding trusts, limited liability companies, and other ownership arrangements used to hold title to a property. Among other goals, the new tax aims to reduce the opacity of shell entities in order to identify taxpayers with actual economic control of a property. When questions arise, speaking with a tax professional or an experienced tax attorney can be helpful.

If you have questions about the tax implications of second-home ownership, property valuation or related compliance matters, contact Robert J. Fedor, L.L.C. at 440-250-9709. The firm advises clients on tax issues involving property ownership, compliance, and potential exposure. With offices in Cleveland and Chicago, the firm serves clients throughout the U.S. and internationally.