For financial advisors with clients who own second homes in New York City, the city's new pied-à-terre tax is turning a once-simple real estate holding into a broader planning question. For some, it could mean reconsidering how the property is owned or used, and the factors to consider could apply to other locations with similar tax laws.
The tax, which took effect July 1, applies to luxury homes that aren't primary residences for the owners, tenants or owners' immediate family members. For the first few years, it would apply to condos and co-ops of at least $1 million in assessed value and one- to three-family homes of $5 million or more. Then, in July 2028, the tax would start at $5 million assessed values for all three property types.
The tax will stay in effect until June 30, 2031 unless extended. For affected homeowners, the first tax bill will be due Jan. 1, 2027. Subsequent bills will follow the regular semiannual property tax schedule.
A change in how a property is owned or used, or where its owner claims residency, can affect estate, gift, property-tax planning and more.
"What we're doing is helping clients model it out and see what the financial impact is, and almost always … the financial impact is not the driving force" behind deciding to sell the property or make other changes, said Lee Korn, financial advisor and principal at Jericho, New York-based registered investment advisor Opal Wealth Advisors. "It's usually family, lifestyle."
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Weighing options to deal with the pied-à-terre tax
These clients might want to switch their New York City residence to be their primary, have a child move into the residence, rent it out or sell the property. Depending on the specifics of their situation, clients might decide to maintain the status quo and simply pay the tax.
"We've been getting lots of calls," Korn said. "The first question is, 'Is this going to affect me?' because there's a lot of ambiguity within the law. … Is it based on assessed value? Is it based on market value? You have to really read into that."
And if the tax will affect the client, "It certainly is prompting us to pull up and dust off the plan," he added. "And it's not just the impact of the extra cash flow" for the tax expenditure.
Depending on the outcome of the review, advisors and clients might decide not to make changes.
"I think the pied-à-terre tax is, for most people, really annoying, but just an added cost of holding an apartment in New York City," said Chris Nason, head of private wealth at New York City-based estate and tax planning platform Wealth.com and a lecturer of trusts and estates planning at Stanford Law School. "I haven't seen a lot of people say, 'That's it. I'm selling out, and I'm getting out,' or 'I'm not going to keep my little apartment by Lincoln Center.' It's just fundamentally and functionally an increase in property taxes."
Korn suggested gifting the property to a child so it becomes their primary residence, though that would affect estate planning. It is "like playing four-dimensional chess, because every decision you make has another impact," he said.
Gifting the property to the child would also have consequences for gift taxes and might be complicated depending on family dynamics.
"You have to have the family situation that makes sense," Nason said. "You're not going to ship a kid from California to New York just to avoid, functionally, a 1% tax or 1.3% tax. Also, you then have to live with your kid, right? You're now a guest in your kid's home, to some extent, when you want to use the property."
An alternative to getting rid of the property entirely is to make it a rental property and find a tenant, Nason said, potentially even renting it to a child.
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For clients who live outside New York state, another option is to switch their residency.
"There's a real conversation to be had, depending on total income, if it makes sense to become a resident again," said Cameron Rogers, a New York City-based partner at registered investment advisor Angeles Wealth Management.
If a client is interested in buying a new second home in the city, the tax shouldn't necessarily be a deterrent.
"If you're bullish on New York residential real estate, and you think it's a good investment, then you can buy it, and you can rent it to a third party," Nason said. "You can buy it and rent it to your child."
Contesting the tax
In the meantime, questions over tax liability remain. Some property owners say the city told them they owe the tax, but they believe they are exempt because of low property values, Bloomberg reported — or because they are city council members required to have their primary residences in the city.
For the first few years of the tax, properties will be valued based on assumed rental values, creating lower valuations, according to Rogers. She also expects some homeowners to contest the tax and request property value assessments because their property values are on the cusp of taxability.
About 4,800 owners have started to seek exemptions, a Department of Finance spokesperson told Bloomberg. The department did not respond to Financial Planning's requests for comment about whether those who received notices that they might owe the tax are able to request property tax reassessments and, depending on the results, not have any liability.
"For people on the bubble, there's always sort of the possibility of fighting city hall and saying your assessment's too high," Nason said. "There's always a bit of a rocky rollout when you introduce an entirely new tax to figure out how it's going to be assessed, and who's going to pay it. But I think that will all shake out reasonably soon."
