Pied-a-Terre Tax Bill Refuses To Go Away

[David Goldsmith]

Pied-a-Terre Tax May Pass in Albany in 2020

A proposed pied-à-terre tax has taken a step forward in Albany, as the Assembly and Senate versions of the bill have been made identical.

therealdeal.com

Pied-à-terre tax moves forward in Albany
Bills in the Assembly and Senate now match, and the state’s broke

As if New York City’s real estate industry didn’t have enough to worry about, a proposed pied-à-terre tax has taken a step forward in Albany.
The bill’s sponsors have overcome a technical issue involving co-ops that largely prevented the tax from being approved last year. And the Assembly and Senate versions of the bill have been made identical, meaning if they pass, they would go to Gov. Andrew Cuomo’s desk to be signed into law or vetoed.

The measure would hike property taxes for high-value second homes in New York City by varying amounts for one- to three-family homes with market values exceeding $5 million and condos and co-ops with assessed values over $300,000. (Assessed values are typically much lower than market values.)

The proposal made it to the state legislature’s runway last year but failed to take off, in part because lawmakers could not fix the co-op glitch: A co-op building pays a single property tax bill, but the pied-à-terre surcharge is supposed to apply to specific owners.

Lawmakers including Senate bill sponsor Brad Hoylman apparently would overcome that by having co-ops collect extra money from absentee owners of pricey units and pass the money along to the state.
If deemed unworkable, that could remain the legislation’s Achilles’ heel, but there is another reason it might pass this year: The state desperately needs money.

Cuomo was looking for $15 billion in federal aid to close the massive budget deficit opened up by the pandemic shutdown, but got zero, and now Congress has adjourned through Labor Day. At some point the state will start running out of cash to pay its bills, and Assembly Speaker Carl Heastie and Senate Majority Leader Andrea Stewart-Cousins have said they are open to tax increases. “If we don’t get the money from Washington, we’re going to have to look to our own tax base,” Hoylman recently told City & State.

The Metropolitan Transportation Authority, meanwhile, needs about $12 billion to keep trains and buses running. The transit system’s need for capital funding was the impetus for the pied-à-terre tax last year, when New York was humming. Now its economy is a wreck.

That fact will likely be the crux of the real estate industry’s argument not to raise taxes on non-primary residences, should hearings be scheduled on the measure. The business community always cites economic downturns as the wrong time for tax hikes, claiming they will make a bad situation worse. (During good times, the community usually argues that a new tax will stop the economy’s momentum.)

“New York City lost population for three years straight before the pandemic and now it has lost an additional 5 percent of its population during the pandemic,” said James Whelan, president of the Real Estate Board of New York, which opposes the tax. “Unemployment is near Great Depression levels. The last thing we need to do is to give people one more reason not to invest in New York City.”

Another reason for the industry to be hopeful is that Cuomo has resisted the idea of raising taxes in response to the pandemic — and, indeed, throughout his 10 years as governor.
But Cuomo has specifically opposed raising state income taxes, saying that would cause people to change their primary residences to other states. He also is fond of saying that New York’s income-tax rates in every bracket are lower than when he became governor in 2011. Those arguments do not apply to the pied-à-terre tax.

The bill being considered would impose a tax of 0.5 percent to 4 percent on home market values above $5 million. For condos and co-ops, the tax would be 10 percent to 13.5 percent on assessed values above $300,000.
The tax would reduce the sale price of expensive units, which has already fallen markedly over the past three years. One source said it might mean a developer such as Gary Barnett might get $18 million instead of $20 million for a luxury condo unit — an estimate that roughly matches that of some analyses. That is the kind of result that would bother precious few state lawmakers.

Nonetheless, real estate players have portrayed the tax in dire terms. In fact, as an alternative last year they proposed an increase in transfer taxes — which are one-time levies, rather than annual ones like the pied-à-terre tax would be.
Albany lawmakers went for it. But with the state’s politics continuing to shift leftward, it is unclear if they would do so again.

 

[David Goldsmith]

Maybe it is the right time for a pied-à-terre tax.

Pied-à-Terre Market Surges in New York City

Remote work and a renewed joie de vivre among buyers has led to more people splitting their time between the city and elsewhere.

therealdeal.com

Pieds-à-terre are having a moment​

Contract signings for part-time residences are up about 70% from pre-pandemic levels​

Danielle Marx missed the vibrancy of Manhattan’s city streets so much that she decided to give up her Carroll Gardens condo for one in Chelsea.
When Marx, the president of a manufacturing and merchandising firm, moved to Brooklyn several years ago, she wanted more outdoor space and a breather from Manhattan’s relentless bustle. But now that she has a house in East Hampton, she’s happy to give up her outdoor space and quiet sidewalks for a pied-à-terre within walking distance of her Midtown office and in a famous art district.

“I felt like I needed to have that back in my life, the endless options that Manhattan offers us,” she said.
Marx, who’s in contract to buy a one-bedroom condo at 500 West 22nd Street where she hopes to move in early June, is far from alone. Contract signings for pieds-à-terre are up seven-fold from their pandemic low and roughly 70 percent from pre-pandemic levels, data from UrbanDigs show.

Brokers say demand is soaring for pieds-à-terre because of remote work, rising rents and a renewed joie de vivre among buyers. With the worst of the pandemic apparently behind us, more and more people want to be in New York City, at least part-time.
“A lot of people started to rethink their lives in the big picture and many of them decided ‘we want to be able to enjoy life,’” said Leonard Steinberg, corporate broker at Compass. “It’s not just the billionaires of the world dividing their time between homes.”
In the past, pieds-à-terre have been popular among wealthy financiers and high-powered executives who wanted to split their time between the city and calmer, greener pastures. Now, remote and hybrid work arrangements have opened that door to people across the income and age spectrums to live a similar lifestyle.

Steinberg said he has clients with upstate homes worth $300,000 to $400,000 who have recently taken on second residences in the city.
“I think it’s an evolution of the pied-à-terre,” he said, adding that it’s “highly unusual” for a trend to be age- and demographic-agnostic.

Data collected by UrbanDigs suggests the increase in pieds-à-terre isn’t just anecdotal. The number of contracts signed for Real Estate Board of New York listings mentioning “pied-à-terre” spiked to record highs in the second quarter of 2021, to 1,320 from a low of 177 in the first full quarter of the pandemic.

Despite the surge, the median price for those listings has remained steady at roughly $750,000. Because many co-op boards prefer having full-time residents, units in buildings that do permit part-timers are usually listed as a pied-à-terre to gain notice.

The pied-à-terre market has also been buoyed by the state legislature’s decision not to implement an extra tax on part-time residences. The proposed surcharge, which would have imposed a higher property tax on part-time residences worth a certain amount, was fervently opposed by the real estate industry two years ago before it was sidelined in favor of a higher transfer tax.

Proponents of a recurring tax tried again last year but could not gain momentum. This year the issue has barely come up in Albany, in part because the state is flush with tax revenue and federal aid.
Broadly speaking, three demographics are driving demand for pieds-à-terre: parents moving closer to their adult children, parents buying apartments for their high school- or college-aged children, and professionals. Many of the last group are bi-coastal or international workers, though foreign buyers have become more scarce.
Buyers on the higher end of the market want bigger pieds-à-terre that can serve as second homes, rather than the traditional closet-sized pad, said Pamela D’Arc, broker at Compass.

“It’s not what it used to imply, which is just a foothold,” said D’Arc, referring to the translation of the French phrase. “I think people have more cash after the pandemic than they might have had before and now they want to use it and real estate is such a good investment.”
Of course, the Manhattan condo market doesn’t only rise; it slumped for several years after peaking in the mid 2010s. But buyers typically expect home values to appreciate over the long term, as they have in the past.
Demand now is so strong that pieds-à-terre buyers are even inquiring at co-ops despite their boards’ historic resistance to part-time residents. Christopher Totaro, an agent at Coldwell Banker Warburg, said he saw a “noticeable uptick” in interest from pieds-à-terre shoppers on three co-op units he recently represented.

“Pieds-à-terre are not a slam dunk for a lot of boards,” Totaro said. “Most banks have a policy where they will not finance in a building that doesn't have a certain percentage of owner-occupied units.” A mostly empty building can find it hard to borrow to pay for repairs or to refinance debt.
Totaro added that many boards see part-time residents as having a “renter mentality” as opposed to an “owner mentality.”
While having a second home or buying a place for a recent grad might seem extravagant, buyers typically see it as a responsible investment.
“Often the people who do these things that appear extravagant are just smart,” Steinberg said.

 

[Upstairs Realty]

I have had a run of recent transactions of parents-buying-for-kids-but-staying-on-the-deed... so the plan is, the kids will be housed while they're going to grad school/first starting their careers, and then they'll presumably launch themselves into larger apartments, and the parents will rent the units (if they can) for a year or two, and then retire into them. I guess that's category #2 mentioned above, but it's s a very different narrative than the traditional "I'm a law partner who lives in Westchester and I just want a pad near Lincoln Center so I can come in and go to a show."

 

[David Goldsmith]

It's going to be harder to vote against that pied-a-terre tax the next time it comes up.

Court Rules NY Vacation Home Owner Can Avoid NY Residency Tax

New York’s vacation-home market got a boost when the Appellate Division sided with taxpayer Nelson Obus, a New Jerseyan with a house upstate.

therealdeal.com

Court slaps down tax rule, boosting second-home market​

NJ resident with NY vacation house beats the system​

New York’s second-home market just got a lift from an unexpected source.
In a ruling that shocked tax experts, an appeals court said out-of-staters with New York vacation homes don’t have to pay income taxes as if they lived in them full-time.

The Appellate Division overturned a longstanding, counter-intuitive state rule that New York tax attorney Glenn Newman called a “disincentive for coming to New York.”

“This helps the vacation home market,” the Greenberg Traurig lawyer said of the decision. “It makes it less likely that someone who uses a vacation home would be subject to the 183-day test.”
That test has long plagued owners of multiple homes. In determining whether someone spends more than half of the year in New York, any part of a day spent in the state is counted as a full day of living in the state.

“The deck is stacked against people,” said Newman. “The burden of proof that you were not in New York is on the taxpayer. How do you prove a negative? How do you prove you were not here?”
The system made no sense to Nelson Obus, an investor and New Jersey resident who commuted to work in New York City and had a vacation home upstate, four hours away. Although Obus only visited the second home only a few weeks each year and kept no personal items there, because he owned it, New York counted his work days in the city as days lived in the state.

Absurd as that sounds, vacation-home owners and their accountants have long accepted it as something they had to live with.
But Obus decided to challenge the system.
That also made no sense, at least financially, because the taxes he paid New York reduced the taxes he owed New Jersey by the same amount. Even if his challenge succeeded, which tax professionals considered a long shot, he would save little or no money.

Obus didn’t care. When his attorney, Newman, mentioned the lack of upside, his client said, “I pay to New York what’s due to New York and I pay to New Jersey what’s due to New Jersey.”
“It was a principled stance,” Newman said.

Obus is not the typical investor making money and staying under the radar. He is known for taking on the Securities and Exchange Commission, which is not something most people do in their spare time.

In this case, the New Jerseyan first had to go before an administrative law judge. After being denied, he asked an obscure body called the Tax Appeals Tribunal to set things straight. Again, the tribunal sided with the state.
Obus was not deterred. He went to the Appellate Division, a court that real estate players know as a place they can get justice if they are victimized by hack judges in state Supreme Court.

A shot at redemption
There are two ways that people who don’t live in New York can be pegged as residents by the state’s roughly 250 notoriously aggressive tax auditors. One is what Berdon LLP partner Wayne Berkowitz calls the “touchy-feely” way: if you consider New York home, based on family and social connections and an intention to move back there.

The other is the statutory way: a permanent place of abode plus 183 or more days in a calendar year. It was those boxes that Obus checked.
“In the past, the standard for a permanent place of abode was fairly low: A place you could live in, with unfettered access,” said Berkowitz. “Didn’t matter if you didn’t stay there, didn’t matter if you didn’t use it.”

Berkowitz and Newman are part of a cottage industry of tax lawyers trying to get New York’s tax collectors to see reason instead of dollar signs. It’s a losing battle, marked by cases like that of John Barker, a Connecticut hedge fund manager who bought a house in the Hamptons so his father-in-law could live there. But Barker stayed there a few weeks a year, and New York claimed him as its own.

Perhaps the most famous case in the insular world of Empire State taxation involved a New Jersey resident named John Gaied who owned a 24-hour auto repair shop and an apartment building on Staten Island. Gaied’s parents lived in the building and he paid their utility bills, did tasks for them and occasionally crashed on their couch after a long day’s work. The state declared him a New Yorker.

Gaied fought the decision all the way to the Court of Appeals — it was the first time in nearly 100 years the state’s highest court had taken a tax residency case — and won.
Even that landmark victory for taxpayers, in 2014, didn’t humble the state. Berkowitz said he expected tax officials to make sweeping changes in their residency regulations, but they just made a few tweaks and went right back to dogging wealthy filers.

“They have a very robust residency audit program,” Newman said diplomatically. “They’ve had it for many years.” About 30, in fact.
Determinations by New York’s Division of Taxation and Finance are hard to undo, but its ruling against Obus was struck down decisively — “to the surprise of every lawyer and practitioner I know,” said Berkowitz.

The judges felt so strongly that they ordered the state to pay Obus’ court costs. And because they ruled unanimously, the state has no automatic appeal. At best, it can ask the Court of Appeals justices to take the case.
“I think there’s going to be enormous pressure on them to take it, because this really upends New York’s whole order,” said Berkowitz. “People who might have been filing as residents because they work in New York and have a vacation home are clearly going to be affected.”

Newman is hopeful that the state will accept the verdict. “It was 5-0,” he said. “It’s not like they convinced any of the judges.”