HABITAT Magazine
Love it or loathe it, the pied-a-terre tax on pricey second homes is here to stay, and co-op and condo boards need to start making preparations now.
The Department of Finance (DOF) will send out notices no later than August 30 identifying apartments that meet the criteria for the surcharge, Brick Underground reports. During the law’s initial phase, that generally means non-primary residences with a market value roughly equivalent to $5 million or more.
The city will bill condo unit-owners directly. In co-ops, however, property taxes are a portion of the monthly maintenance, so co-op boards will have to establish a process for collecting the tax. Here are five questions co-op boards will need to answer:
What qualifies an apartment as a pied-a-terre, or non-primary residence? DOF will likely use the co-op and condo tax abatement to determine whether an apartment is a pied-à-terre. Since this abatement is a tax break for primary residents, it follows that a shareholder or unit-owner who is receiving the abatement is using the apartment as their primary residence and therefore the pied-à-terre tax would not apply.
Can the determination be challenged? Condo unit-owners and co-op shareholders can contest the determination that an apartment is a second home. A challenge needs to be made within 30 days from the notice date.
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 law 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. A DOF market value of $1 million generally corresponds to a co-op or condo worth about $5 million on the open market — which would make the apartment liable for the PAT 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.
How will co-ops collect the tax? The co-op board or managing agent will receive notices identifying which apartments are subject to the pied-à-terre tax, and they will then have to notify the affected shareholders. 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 shareholders fail to pay, there could be a range of other problems.
Stuart Saft, a partner at the law firm Holland & Knight and no fan of the PAT tax, offers this scenario in the firm’s newsletter: “If a shareholder refuses to pay the PAT Tax, the board must decide between two unappetizing options: The board can pay the surcharge out of building funds, effectively advancing the nonpaying shareholder’s PAT tax obligation from reserves that belong to all shareholders; or (it can) allow the surcharge to remain unpaid on the building’s property tax account, where interest begins compounding at 18% per annum against the entire building while the board pursues the shareholder…with no certainty of ever being reimbursed… Neither option is acceptable because both cause direct harm to innocent shareholders who have nothing to do with the non-primary unit.”
What should co-op boards do now to prepare? Co-op boards should 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, letting them know what the surcharge will likely be so they can start planning and budgeting.
Martha Stark, a professor at the Robert F. Wagner Graduate School of Public Service at NYU and a former city 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 his or her primary residence.