The Aug. 30 notice deadline is the date to watch for the New York City pied-à-terre tax. According to two real estate attorneys, after that deadline, there will likely be a lot more questions about the tax and how it’s being implemented.
New York City’s Department of Finance will notify owners by Aug. 30 on whether their property is subject to the new pied-à-terre tax, an annual surcharge on non-primary residences that took effect July 1.
Andrew Freedland
But according to Andrew Freedland, a real estate partner at law firm Herrick, and Mark Limardo, a tax partner at the firm, the surcharge’s structure creates exposure well beyond that notice — in co-op collections disputes, retroactive audits and standard estate-planning trusts that were never built with this tax in mind.
A tax that can follow the sale
Unlike a traditional property tax, which is issued, paid and closed for the year, the pied-à-terre tax ties eligibility to how a property is used, not just its assessed value, Limardo said. That distinction gives the Department of Finance six years to audit a primary-residence claim after the fact.
“The city has six years to come in and audit,” Limardo said. “It doesn’t matter if the property has changed hands.”
If the department later determines a property didn’t qualify as a primary residence for a given tax year, the statute appears to allow a lien for that unpaid surcharge to attach to the property regardless of who owns it at the time, Limardo said. A buyer who closes without knowing a previous owner’s primary-residence claim is under audit could inherit that lien years later.
Mark Limardo
Freedland, who represents co-op and condo boards, raised the same scenario independently. If an owner isn’t billed for the surcharge and later sells, and the city subsequently determines the prior owner should have paid it, the new owner could be the one facing the bill, he said.
Co-ops face new collection questions
For condo owners, the surcharge is simple: It’s added directly to the unit’s tax bill. Co-ops are more complicated, Freedland said, because a co-op is a single tax lot. The city bills the surcharge to the building as a whole, and the co-op is then responsible for collecting it from the individual shareholder.
Most proprietary leases don’t have a category for this kind of charge, and in many buildings, it likely doesn’t qualify as additional rent, Freedland said. That could mean a co-op board can’t use a standard nonpayment proceeding to collect and, instead, has to sue in New York State Supreme Court, a slower and costlier process.
In the meantime, if a shareholder disputes or delays payment, other residents effectively cover the gap.
“The other shareholders in the building are essentially covering it for that person in the interim, until the co-op can collect it through legal action,” Freedland said.
One fix is amending the proprietary lease to classify the surcharge as additional rent, which would allow faster collection through landlord-tenant court. But proprietary lease amendments typically require a supermajority of shareholders — often two-thirds, sometimes as much as 80 percent, Freedland said, calling it a significant undertaking for a board to organize.
Standard estate planning can trigger the tax
The surcharge applies only if a property exceeds a market-value threshold and isn’t used as a primary residence. To determine primary-residence status, the statute looks for an individual owner, not an entity, Limardo said. That creates a problem for properties held in trusts, a common estate-planning structure in New York City real estate.
Under the city’s proposed rules, a trust can claim its property as a primary residence only if it has a single beneficiary who lives there, Limardo said. That requirement doesn’t only apply to current beneficiaries. Contingent or remainder beneficiaries count, too.
“If you have a trust with more than one beneficiary, the trust cannot use this rule,” Limardo said.
That raises new questions for a routine structure known as a qualified personal residence trust, in which parents hold a home in trust, with their children named as contingent beneficiaries. Nothing about who lives in the property changes. But because the trust has more than one eventual beneficiary, it may not qualify for the primary-residence exemption, regardless of how long the family has lived there or when the trust was created.
What it means for deals going forward
Limardo predicted purchase contracts for higher-end New York City properties will start to resemble the kind used in company acquisitions, with sellers providing representations on a property’s primary-residence status and buyers negotiating indemnification tied to the six-year audit window.
“You’re going to want a rep from the seller on what the state of play is on the pied-à-terre tax,” Limardo said.
He also expects the standard order of financial disclosure in a deal to flip.
“The tax return flow is going to be reversed,” Limardo said. “You’re going to see buyers saying to sellers, ‘I want to see your tax return because I want to see if you listed this as your permanent residence.'”
That documentation question isn’t limited to pied-à-terre tax cases. The New York Times reported that residency evidence — including the address listed on state and federal tax returns, driver’s license and voter registration, and even where a car is registered — can support a primary-residence claim in a separate context: Capital gains exclusions on the sale of a primary home.
Louis Tuchman, chair of the tax department at Herrick, told The Times, “The stakes are high enough to take as many steps as you can.”
Legal challenges expected, but attorneys are skeptical
Both attorneys said they expect the pied-à-terre tax to face constitutional challenges once notices go out this summer. Limardo said he’s skeptical that such a challenge would succeed. He compared the surcharge to prior constitutional challenges against New York’s rent control laws, which he said have repeatedly failed in court.
“If rent control isn’t a constitutional issue, I’m not sure this is,” Limardo said.
Freedland said he expects the tax’s validity to be tested in court but described the outcome as uncertain.
