Greg Heym’s Crossing the Line - Episode 316: Everything You Want to Know About the Pied-a-terre Tax

[00:00:01][music] >> Welcome everybody to our championship edition of Greg Han's Crossing the Line.

[00:00:08]Yes, the Knicks are world champions. Jalen, you did it.

[00:00:14]I gave you a lot of crap for not being a champion yet, but you are.

[00:00:19]You're the king of New York, enjoy it.

[00:00:21]You deserve it, your team deserves [music] it, Mike Brown deserves it, and more importantly, we as fans deserve it.

[00:00:28]Uh it was a one of the weirdest playoff runs I've ever seen in my life where you fall behind every game and you you you you get used to it. Just like, "Ah, it's it's only 20. They'll they'll they can make that up."

[00:00:42]>> It was insane. Come on. It's But it's great to see that they can come from behind. You know, you have going to have to start worrying when they're leading.

[00:00:49]>> I know that we won't know what to do. By the way, we have Professor Martha Stark, Esquire.

[00:00:55]>> Thank you. Thanks.

[00:00:56]>> Who has done everything.

[00:00:58]Uh NYU graduate school professor.

[00:01:00]Uh former New York City Commissioner of Finance. Uh you know, we have all-star guests when we have super you know, celebrations and championships. We got to have quality guests and and nobody's better at what we're going to discuss today than Martha. But I I just have a little message for Adam Silver in the NBA. Um your officiating's disgusting. And and I'm saying this and we won.

[00:01:27]The way Wemby was protected, how he can throw down Jalen Brunson in front of three officials who don't claim they don't see it, and then you review it and you don't think it's a flagrant foul, but if somebody shoots and you tip the little toe of the defender, that's an automatic flagrant. Would would they have upped the foul on Brunson to a flagrant if they reviewed it? They would have had to, I would have thought, because that's like an an easy call.

[00:01:58]>> You know, it's so interesting. I was just reading this morning in the context of the WNBA that um during the off-season they the refs go and do like a sort of whole hang out with the coaches and they review tape to see what calls they missed and um actually they're being evaluated kind of almost every week. Um I don't know if that's true in the NBA, too, but I'm got to suspect that it is. Um and really really um interesting how they're reviewing it and trying to sort of make themselves better.

[00:02:32]>> role of missed Wembanyama calls are going to be pretty long.

[00:02:34]>> That's that's right. It's going to be It's going to be interesting to see if they do that during the off-season.

[00:02:39]>> You know, this whole idea of trying to explain to my son what the NBA was like in the '80s. You know, he can see Charles Barkley doesn't look too too scary now, but I'm like you know, if if that was Isiah Thomas and that was the Bad Boys that Wembanyama would not have gotten out of the arena alive. Like it it would have been Back in those days you didn't wait for the refs to step in.

[00:02:59]You You handle that stuff yourself. You think of what Detroit used to do to the Lakers, what the Celtics used to do to the Lakers. It's amazing the Lakers survived no matter who they were playing.

[00:03:08]They They were going to get roughed up.

[00:03:09]>> Absolutely.

[00:03:10]>> But congratulations, you know, and it seems like you know, the parade is this week. It seems like people didn't get too out of hand cuz they read my column.

[00:03:18]I warned people.

[00:03:19]>> You said don't don't You said behave.

[00:03:21]>> Behave and I said cuz it was disgusting.

[00:03:23]It was disgusting after Wednesday.

[00:03:25]>> No, it wasn't.

[00:03:25]>> Um you know, we we have to do better.

[00:03:30]>> Yeah, well, they did destroy some buses that were taking people to the World Cup in Jersey.

[00:03:36]>> doing them a favor. Soccer, we don't care.

[00:03:38]>> [laughter] >> No, I get a lot of grief from I I have no interest in soccer at all. I Sorry for losing. We've already lost anybody from Philly as viewers of the show cuz I say enough about Philly fans and Philly teams. But I can't say that now because three villain over players just won a world championship.

[00:03:56]>> Well, why Martha is on the show today is we're going to be talking all about the pied-a-terre tax. I know I've gone off about this before, but now we have a little more information. We're going to share some knowledge. We're going to throw some hypotheticals at Martha.

[00:04:09]She's going to straighten all this out for us >> [laughter] >> right after these messages from our wonderful sponsors.

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[00:04:48]>> So, we're here to talk about the second home non-primary residence surcharge or pied-a-terre tax, whatever you would Technically, it's a surcharge. That means something and maybe we'll touch on that. But, basically, this has been what In one sense, it reunited me and Martha after years apart. Like Peaches and Herb, we were all of a sudden we were reunited and it felt so good.

[00:05:12]On the other hand, we >> [clears throat] >> they didn't like it because we spent seven less seven or eight years fighting this tax.

[00:05:18]Um basically, somebody said, "Hey, you know we should tax people who can't vote us out. People who who have a second home and have the nerve not to pay income taxes and even though they don't use the services and they pay everything else, which three-quarters of the tax that city the city collects is not income tax.

[00:05:41]You know, and the property tax being the the uh the largest tax and the most reliable source of revenue they have, but that's not enough. They they pay more than their neighbors cuz they don't get exemptions. Uh but now it's finally happened.

[00:05:57]And it there's a lot of reasons to dislike this tax and I railed on on most of them.

[00:06:04]But we're we're going to talk a little bit more about the nuances of the thing, how it works, what what we still don't know. We got some rules issued. Martha, you know, was commissioner of finance in the Bloomberg administration, so she knows all about this.

[00:06:19]Uh so basically it starts with you can do you can do this one or two ways. Is it your primary residence or isn't it?

[00:06:28]Or what is the market value of this property?

[00:06:31]>> Right.

[00:06:32]>> And let's just talk about market value for a minute cuz that creates a problem for apartments because of the way they're valued. They're not using a sales-based approach, right? So this is where we have two different rules.

[00:06:47]And uh why don't why don't we go into that? One to three-family class one properties, $5 million market value.

[00:06:54]They use sales to value those, so that's pretty accurate.

[00:06:57]>> Well, I don't know.

[00:06:59]>> I'm going to be nice.

[00:07:00]>> Okay.

[00:07:00]>> It it you know, it it's somewhat accurate.

[00:07:02]>> Mhm.

[00:07:03]>> And co-ops and condos are valued as if they were rental buildings. State law prohibits the city from valuing them using sales comps.

[00:07:12]And that leads to grossly undervalued property, so the threshold is a million.

[00:07:18]>> Mhm.

[00:07:18]>> Now, did they do an extensive study to get to a million or you think they just kind of I know you were involved in a lot of these talks. How how good do you feel that a million market value is close to a $5 million sale price?

[00:07:31]>> So so let me just say sort of say a couple things. The first the first is that um they did do some analysis, right? I mean, I wouldn't say um a lot. I mean, I think that there was a kind of goal set up that, you know, the city needed money, the mayor needed money, and why not actually re re bring this back from the dead.

[00:07:55]Basically, I thought it was dead and buried, but in 2019, but bring it back from the dead. And to do it in a way that really sort of targeted people, like you said, who don't live in the city and don't pay income taxes as well.

[00:08:13]I I I I think it's important to also remember, you know, the commuter tax and the commuter tax's demise. And so, the city has for a while thought about people who do benefit from city services, even though you're right, like, you know, they don't send their kids to school here as far as we know.

[00:08:31]And so, trying to figure out how to kind of best do this. Okay, so, what kind of analysis did they do?

[00:08:37]I think the the state folks were looking at, like, sales prices and saying kind of what approximately is the assessed value.

[00:08:46]>> state has to get involved because the city can't do a lot of these things on their own.

[00:08:52]>> That is correct. They can't adopt new taxes on their own. And even the structure of the property tax is set at the state level, right? So, they definitely needed authority from the state in order to do this pied-a-terre tax.

[00:09:08]And 1 million threshold, you know, I've kind of done a little bit of analysis on this.

[00:09:14]It's going to get some properties that are actually sale sell for $3 million.

[00:09:21]And it can get some properties that sell for as much as 9 to 10 million dollars.

[00:09:27]So, the $1 million assessment value threshold, I think the numbers that I saw kind of at the median, it's around a less than 5 million, um but above it's um it's definitely going to capture property certified.

[00:09:42]>> reason they had to stick with market values they didn't have time to come up with a sales base approach for these co-ops and condos in time cuz they want the money now.

[00:09:53]>> Right. I mean, clearly the mayor needed money for this fiscal year in order to close what was a big budget deficit. He seems to, at least based on the numbers, he's managed to do that. Um but um this $500 million estimate that they wanted from this tax was going to help in that regard.

[00:10:12]>> Yeah, they did that. It usually does help 500 but when you're when you're talking about your gaps in the billions, you know, it's like the MTA with a $70 billion capital plan. It's like, "Oh, the the congestion pricing is raising, you know, 100 million a month or whatever." And you go, "Okay."

[00:10:29]>> Well, you know, it's interesting because it right, the city's budget is so large.

[00:10:33]I mean, it's over 100 It's almost $115 billion. And so, um I I I I used to joke about this when I was finance commissioner and people would say to me, "Well, but this would raise 200 million." And I would be like, "Well, it's 200 million dollars of aggravation and 200 million dollars is a rounding error." Which, you know, on the city's overall budget, it's really a rounding error. Um so, 500 million seems quite small in the scheme of things, but um the governor wanted to provide some help to the mayor in this regard.

[00:11:02]>> So, to acknowledge that the market values they were going to use were not, you know, accurate on the the co-op and condo side. And and co-ops don't get individual values.

[00:11:14]Uh the building gets a valuation and then that is, you know, paid by through maintenance.

[00:11:20]Um and really based on the percentage of shares you own is the easiest way to talk about it. So, they decided to do two phases of this.

[00:11:27]>> Yes.

[00:11:28]>> Phase one or the keep everything the same phase where we just use the market, not the assessed value the market values that first number and that's for the first two years. That buys them two years to come up with a sales based approach to value co-ops and condos.

[00:11:45]The kicker is for property tax purposes they're still going to use the old system.

[00:11:50]>> Yeah.

[00:11:51]>> Cuz they they they're not changing that.

[00:11:52]>> Yes, that's correct.

[00:11:53]>> Which which again uses rental comps and it really they they have to pick buildings in the area built roughly around the same time or >> don't. They don't have to pick buildings in the same area.

[00:12:05]No. Um they don't have to and and I do I I do want to talk about our lawsuit tax equity now in New York because in that lawsuit what we um pointed out to the city was one they don't need to use regulated rents when valuing co-ops and condos. I mean one of the issues was that they were using regulated rents. So it's no wonder you're going to get a lower value.

[00:12:28]>> why the co-ops that everybody that's why the co-ops are so under valued cuz they're older buildings more rent regulated units.

[00:12:34]>> Exactly. And so that's a a problem. Um our court case and the court of appeals ruled two years ago that actually they could use market rents, right? And so if they were to use market rents to value those buildings, that would get you a better value. So I'm I'm going to take issue with an inaccurate value. I think they arrive at a what they thought of as a legal value, but they have more um sort of flexibility um in terms of getting to market rents rather than using really really low regulated rents.

[00:13:05]Those values might get you closer to sales price um and stuff. But yes, you are absolutely right. Two phases. Phase one use finances existing market values.

[00:13:15]Phase two and you said two years they really have 18 months because they're going to have to put those out by January of 2028, right? Um in order to actually follow >> Yeah, cuz they're going to have to and you know, again they you have they have to start notifying people this year by the end of August.

[00:13:31]>> Right.

[00:13:31]>> Um whether they pay. It's It's interesting though because then when you hit phase two, you're going to have two market values to challenge.

[00:13:39]>> Right.

[00:13:40]>> Good which is double the fun for the tax commission because you do have the right to contest the values and your your residency right with with the tax commission.

[00:13:48]>> Yeah, so so interesting stuff about the tax commission. We're still awaiting rules from the tax commission. The Department of Finance has issued rules about the pied-a-terre tax. The finance um the tax commission has not. Um and it's important to remember that actually the tax commission doesn't have jurisdiction over market values. The state law now gives them that jurisdiction, but they're going to have to tell people how they plan to do it because they've not worked in market values. They've only worked in assessed values. Um and they know very little about primary residency stuff. So the the tax commission is had been primarily a property tax review um sort of >> Yeah, you go in you get like a 30-second hearing or whatever.

[00:14:32]>> Right. And you know, they would say, "Well, okay, now we're going to reduce your um um assessed value." But they're not really the experts when it comes to primary residency, which of course is mostly done on the income tax side.

[00:14:44]>> Right.

[00:14:45]>> So it's very interesting.

[00:14:46]>> So we have phase one, phase two, and then this expires in five years.

[00:14:51]>> Well, there was a there is definitely a sunset in the >> There is a sunset. I don't think anybody buys that they're they're going to not that this wouldn't be extended.

[00:15:01]Um And just to to talk briefly about how this works, you know, that I'm sure most people know this that are are interested, but we'll go over it. Um the the threshold again for one of to three family homes or class tax class one is 5 million or more.

[00:15:19]>> Right.

[00:15:19]>> And if you're between 5 and 15 million, you pay 0.8%. This is annually.

[00:15:25]Uh 15 to 25 is 1.05%.

[00:15:29]And over 25 million is 1.3 percent of the total market value, not over a threshold.

[00:15:36]>> Correct.

[00:15:37]>> This was structured differently in previous versions where you'd pay a flat amount and then what you're over. Co-ops and condos were starting at a million, so the tax rates are higher.

[00:15:46]Uh 1 to 3 is 4%. 3 to 5 million is 5 and a quarter. And over 5 million is 6 and a half percent.

[00:15:55]Now, when we go to phase two, nothing changes for class one properties.

[00:15:59]They're going to still have the same values. Then the thresholds will be 5 million and over for the other uh properties, which are co-ops and condos.

[00:16:08]>> Right.

[00:16:09]>> And you know, that's that's basically how it works.

[00:16:13]There are exemptions from this and ways you can avoid paying it if again it has to be your primary residence or and there's a this is where it kicks in. There is a bunch of ors.

[00:16:27]So you you you can sell it.

[00:16:30]Then you don't have to pay. Somebody else may have to deal with that.

[00:16:34]You can rent it. It has to be the primary residence of a tenant who has a a bonafide lease of at least 1 year.

[00:16:43]Um you can't just charge your buddy $50 a month to live in the apartment. That's not going to work.

[00:16:48]Family occupied.

[00:16:50]>> [clears throat] >> By a uh primary resident. Now, does it have to be an adult? I guess it it does.

[00:16:56]>> I don't think you >> You'd put a kid >> avoid the penalties, I don't think you can put the you know, cradle in and have um have your >> Have junior in there?

[00:17:07]>> six-month-old, you know. Well, you have junior as long as junior's kind of able to sign a lease.

[00:17:12]>> The interesting >> really need a lease for the for the family member.

[00:17:15]>> The interesting thing and that's immediate family. We're talking parents, grandparents, children, grandchildren.

[00:17:21]Uh sorry, nieces and nephews. We all love you, but yes, you don't count. Um you know, you think in the bill these this stuff would be laid out specifically, but as I always tell people going back to my revenue days, there's the the laws that get passed, and then there's the rules.

[00:17:35]>> Mhm.

[00:17:36]>> Now, the rules have come out, which have not really proposed rules, I guess, this time to comment, that have not really got into some of the finer points of these exemptions.

[00:17:48]Um and you know, I've been getting a lot of questions and want to go through some of these a little bit. I know you and me have talked about them, but for the wonderful folks viewing the show that we love so much, >> [snorts] >> you know, people say, "Okay, let's say I I have a primary residence in New York City. I just bought a new apartment. I'm renovating it.

[00:18:12]Can't move in yet. Work's not done.

[00:18:15]Is there a grace period? You know, seems like it would be reasonable to give people a certain amount of time, but this doesn't necessarily address the the the rules and the bill don't address this situation.

[00:18:31]But we've talked about the idea of taxable status thing. We'll get into get into that for in a minute, cuz that plays a huge part in any benefits that get added or taken away.

[00:18:42]>> Mhm.

[00:18:42]>> And now this is really going to matter a lot for buyers and sellers, because this tax will literally double a lot of people's property taxes. When you think about it, what they're paying now versus what And another example of why market value for a condos is is so messed up, you know, Ken Griffin's apartment, 240 million bucks, market value of 15 and a half million. They're not saying that's what it's worth.

[00:19:09]That's what it's valued at for property tax purposes.

[00:19:12]>> Right.

[00:19:13]>> Um so in this case, we can't say exactly, you know, but it would be reasonable to expect that maybe either you're going to tell people to time this around taxable status date or is there any chance finance offers us a little more clarity on this situation?

[00:19:34]>> So, a couple things. One is as you said rules have been issued and um you have until July 19th to comment on them. And so, um I've been working a little bit with the real estate board. Um and so, we sent around a draft sort of set of uh questions and examples for them to include as part of the rules. Um I think finance is looking at the rules themselves first and then after they clarify a lot of the language in the rules, then they will put a bunch of hypotheticals in. So, if there are things that um brokers and others are encountering and they want clarity, think the best way to do that is to submit um those as examples. And so, the one that you just gave um interesting to think about it from sort of two vantage points. First off is as you said the taxable status date in New York is January 5th. And I I just want to be clear, taxable status date is not a new concept. It's in >> the rules. I mean, so much so that those of us who've worked in property taxes before would say to you, if your house burns down on January 6th, you are the taxable status date is January 5th. If the building existed on January 5th, it burns down on January 6th, you're liable for taxes on that building for the remainder of the current fiscal year, which runs through June 30th, my birthday by the way, and the entire following fiscal year.

[00:21:09]I I don't see it. I don't see it. It's June. It's in the month.

[00:21:13]In any event, um so in any event, all of that to say taxable stat state is not a new thing.

[00:21:18]So people need to think about January 5th though as this date that's relevant.

[00:21:23]So again, the hypothetical that you gave, January 5th, when did So what happens on January 5th? Where are you?

[00:21:30]Are you in the old right, you in the old residence?

[00:21:34]If the answer is yes, is it above the threshold and possibly a pied-a-terre, then you might be liable for pied-a-terre on that. Um two planning things that you can do. First is um interesting is it cosmetic renovations or is it a renovation that requires the issuance of a new CFO?

[00:21:54]Interestingly, because if you don't have a CEO CFO for that property, there's an exemption. You talked about that there are some um exemptions in the rules. So I think that again, it's going to be great for people who help folks plan their taxes.

[00:22:11]>> People like Professor Martha Stark as lawyer.

[00:22:13]>> That's not usually what I do, but perhaps I should um hang out a shingle and start doing that.

[00:22:18]>> the So the the CFO thing is really targeted, it seems to me, for sponsor units in new buildings. Like they shouldn't have to pay pied-a-terre tax on units that haven't been sold yet.

[00:22:28]Somebody asked me in a sales meeting, you know, a lot of older co-ops don't have CFOs.

[00:22:32]>> Right.

[00:22:33]>> Does that mean that they don't pay this tax? And I said, "Well, that's certainly not the intent."

[00:22:38]They're not unsold units. They've been occupied. But see, that's another technicality that somebody may think they could use to exploit this, but >> Right. And and again, tax planning is not exploitation. Tax planning is planning, right? And planning within the you know, sort of existing rules in a way that's not fraudulent, but at least wants to understand what's going on there.

[00:23:00]>> going to suggest cuz you mentioned this in regards to another part.

[00:23:04]>> So, the the question of um is there a family member that can be in in the apartment? Um if it's a married couple, is it possible to have one be its residence and the other be someone else's? So, again, I think that people have to recognize that there's some planning opportunities around this that's not about avoiding the tax, but if the city is not going to recognize a grace period, they don't have any authority in the legislation, by the way, where it says >> Right.

[00:23:34]>> you can recognize a grace period. So, um you also don't want them to expand the rules further than they're um or curtail the rules from the law. So, for example, I think you had a question about trust um or estates. I think um if somebody dies, right?

[00:23:52]>> Right.

[00:23:52]>> Um so, interesting, you know, when I was in law school, when you took a course, it was always a trust and estates course, because you always thought that the estate um usually created a testamentary trust, right? That's what um happened. The rules or the law doesn't talk about estates, but they do talk about trust and LLCs, and how to sort of handle them. So, in any event, all of that to say, I think there's huge opportunities for people to provide finance with here's the kind of situations that we're actually encountering, and we need guidance about how um we should we should answer those questions.

[00:24:30]>> Right. And you know, a lot of brokers have come up to me with these questions.

[00:24:34]And what do you mean it's not in the bill?

[00:24:35]>> Right.

[00:24:36]>> It's like cuz they don't think of every scenario.

[00:24:38]>> How could they possibly?

[00:24:39]>> And you know, with the question is too, with the renovation, if I'm going to buy something I need to renovate, then yeah, I'm going to buy it after January 5th, so I have a whole year almost to get those renovations done before the status could change, right?

[00:24:54]>> Right. I do think it's you know, it's a question of planning. I mean, not for profits used to have to do that too, right? It's like if you buy before the taxable status date, then and you're an exempt entity, you get the exemption. If you don't, so I mean, I think those are the kinds of questions that people have to be thinking about now as as what >> leads to what could be a negotiation. I'm buying your apartment, you're paying the tax.

[00:25:20]>> Right.

[00:25:21]>> I'm going to be a primary resident.

[00:25:23]>> Right.

[00:25:23]>> But it's January 7th. And then I'm told by my lawyer that oh, you're not going to be able to take that off until a year from January, which means you're going to pay the Well, I Yeah, you can take it off and then it will start a year and a half when the fiscal year begins July 1st.

[00:25:41]>> So, I'm going to have to pay the pied-a-terre tax, so I'm going to want a concession and we're going to have to talk about it, right? That makes sense.

[00:25:47]>> I think that's what um people are going to have to do. And you know, usually um lawyers doing closings don't at all think very much about the property tax side. It's always been uh you know, sort of a pet peeve of mine that the people aren't real estate practices at law firms know very little about the property tax and the property tax is thought of separately. They're going to have to start talking to each other because um a lot of deals are going to turn on um what's going on here with this tax slash surcharge.

[00:26:18]>> So, with the estate it's really going to come down to taxable status date and and how long that gives you to sell because it could be on the hook for it, right? I mean, if if the person is passed and you can't put another family member in there.

[00:26:33]>> Right. If if they do not figure out um or at least kind of cover the estates in the trust rules, which by the way, one of the reasons I talked about the rules can curtail authority or kind of give more authority. The rules as currently drafted, um if I read them correctly, the Department of Finance actually changed what qualifies under the trust rules, right? They they changed it so it's got to be a sole beneficiary. And the actual law said a majority. So, if you could imagine a trust that's set up for three people and one has a 60% the law said that that person, the 60% person, could qualify for this exemption, but the rules say a sole on person. So, it has to be one person. So, things like that and and that that will just lead to litigation.

[00:27:29]I mean, all of this may lead to litigation, but if Finance is not careful about making sure that they're not exceeding their authority under the law, it's just going to further complicate things and make make it really difficult.

[00:27:44]>> Well, further complicating things was the issue about rentals. And there was a I did a sales meeting downtown and they just kept throwing scenarios at me and ways. So, again, it's got to be a bonafide lease. I can't rent it to somebody at a ridiculous amount. But then the question came up, what happens if during the fiscal year someone has to move out, they lost [clears throat] their job, they change their primary residence while they're in the apartment.

[00:28:09]>> Yep.

[00:28:09]>> Um I guess or if somebody passes on, >> Yeah.

[00:28:14]>> it's all about >> That time of year and the state.

[00:28:16]>> and and what happens there? They're only going to check once a year.

[00:28:19]>> That's what it sounds like. I mean, I you know, that Look, we're not sure how they're going to even do once a year, right? We're not very very clear about >> think they're sure either.

[00:28:29]>> Right, exactly. So, so yeah, that date is really telling. So, if as of January 5th, the person was still alive, it was their primary residence, it's going to be exempt for the period of time that kicks off the following fiscal year. So, that date's going to be really telling.

[00:28:49]>> And and on the flip side, if you your lease commences January 6th, too bad, you're going to have to pay that year.

[00:28:56]That's correct. And then you're going to have to wait.

[00:28:58]>> So so can I another another thing actually and I cuz I've been looking at this probably far too much. I mean, you know, not watching enough of the Knicks game. I only tuned in for the third and fourth quarter.

[00:29:10]>> Don't worry, the WNBA playoffs haven't started. You're okay.

[00:29:12]>> right. But the Liberty are on a seven-game winning streak. I just want to put that out there um right now. So, um and they're going to play um representing the East in the Commissioner's Cup. Okay. All right.

[00:29:22]Now, back to the pied-à-terre tax. So, one of the interesting things is, okay, this year, this isn't a problem, right?

[00:29:29]So, but in future years it is because if you have to prove prove primary residency on January 5th On January 5th, I was a a resident of New York City and I paid I paid income taxes in New York City, but we don't file our income tax return until April 15th if not extended to October 15th. So, that's a a whole 'nother dilemma. Are we going to use and I certainly would say if someone has a tax return with that address on it showing that they paid New York City income taxes, that's their primary residence, but they're not going to file the that return until later in the in the year.

[00:30:12]>> rules mention it has to be for the current year?

[00:30:14]>> Well, what other year would you >> Well, like I I you know, I was thinking that when DOF collects income and expense data on properties, that lags.

[00:30:24]>> That's correct, but that's an intentional lag so that they can value property. But if the primary resident, you want them to be primary residents as of January 5th, you need their prior year. So, let's take this year, 2026. I need your 2025 tax return in order to sort of suggest that. I mean, of course you could have moved, but that's a whole 'nother um sort of area that's not covered in the rules. [snorts] >> Well, they they could also require it by April 15th or something, but as you pointed out to me a bunch of times, they don't like to do things in the middle. Once that date passes, nothing will change. It's like the co-op condo abatement, you know, you you have to wait.

[00:31:03]>> Right. Well, also they're, you know, issuing an assessment roll on January 15th, so you don't want to wait till April 15th to know, am I liable for this or am I not? So, anyway, lots of things that um folks didn't quite think through in putting this together.

[00:31:20]>> And one last scenario that keeps coming up, but we've kind of told the solution to this, is somebody owning multiple units in a co-op. What can they do about that? Well, combine them for for one thing or put one in a family member's name or a spouse's name or something like that.

[00:31:36]>> So, and and also the question in the co-op is, is it below or above the threshold? So, do they own three units with assessed values greater than a million dollars? Um I don't I don't know, but depending on that. So, I you know, first question is, am I actually potentially taxable before you start thinking about how do I actually plan around this?

[00:31:59]>> And remember a couple of things as we've we've had a bunch of agents call me and say, well, I know it's a million-dollar market value, but we're we're buying this apartment for 5 million. So, what does that mean? I go, what you're buying it for it means nothing for the first 2 years.

[00:32:16]>> Right.

[00:32:16]>> And you know, we use words market value and assessed value, they get used kind of interchangeably at times. Assessed value, which is a percentage of market value, has no bearing in this tax.

[00:32:28]>> None whatsoever.

[00:32:29]>> None whatsoever. So, when you go to the DOF's website, you want to look at the current market value for this year or the upcoming year.

[00:32:37]>> Right.

[00:32:37]>> And the top line number, you know, estimated market value, ignore everything below that for 2 years.

[00:32:45]Um if if we're talking about co-ops and condos, but even with single-family homes, just because you paid 5 million for it, that does not mean that's what the market value is going to be. It's certainly considered a sale, but just like an an appraisal doesn't always come in right at the sale price, uh market values aren't going to come in at the sale price, either.

[00:33:07]>> Yeah, and also, I mean, we talked a lot about the co-ops and condos where the million dollars isn't reflective of what the sales price would be. Um it's true on the housing, the one, two, and three families as well. The $5 million that finance says might not be what you're you might actually have a $3 million property. And so, you need to sort of think about that um as well. Heretofore, if you own a one-to-three family home, you never looked at your market value.

[00:33:36]You didn't challenge your market value because your assessment is only um at most 4% of your um sales price. So, >> And this goes to something that your group has talked about. You talk about an inequitable tax system, is this cap on assessment you assessment increases that have That's why townhouse owners, especially in in the more expensive parts of New York City, can't challenge the taxes because there's an implied market value based on the caps to their assessed value.

[00:34:06]>> So, I'm just going to say our lawsuit said the city has an obligation to have a uniform assessment ratio, so they have to stop saying it's 6%. It's not uniform at 6%. If I have a $100 house, I'm not assessed at six, so they can actually have a uniform assessment ratio by lowering the ratio to $3 or 3%. So, we don't blame the caps. The caps are a feature of the tax, but it does not excuse the lack of uniformity um that the city actually controls the city.

[00:34:36]Nobody told them 6%.

[00:34:38]They [snorts] have to decide what would lead to uniformity so that a $100 house pays or is assessed at the same amount.

[00:34:45]So, I'm just going to I I I I just cuz it gets >> No, you got to hit them with the now.

[00:34:49]Well, you know what? Uh on that note, we'll we'll take our our last break so everybody can calm down and shake their heads and get some caffeine. We'll be right back.

[00:34:57]>> [laughter] >> This beautiful set here at Studio 1873 is brought to you by The Everset. The Everset provides full service staging and furniture rental solutions in the New York area.

[00:35:08]For more information, please visit us at staging.theeverset.com or email us at [email protected] to request a free proposal.

[00:35:18]>> And we're back with my good buddy Martha Stark uh talking all things pied-a-terre tax. So, there's so many things about this that are uh uh uh at surface, it seems somewhat easy for now. There's a DOLF market value. I can look it up. If it's a one-to-three-family home or a condo, I can find it specifically for my property. What's the value? I have the right to contest it. I have to prove primary residence.

[00:35:46]Pretty straightforward.

[00:35:48]Co-op side, not so much because the building gets a uh a value, right? And then it would be apportioned based on this percentage of shares. So, if you own a co-op or you're buying one, the way to look at it is look at the market value for the whole building.

[00:36:07]>> Right.

[00:36:07]>> What's the shares in the unit? And then divide that by the total shares of the building.

[00:36:11]>> Mhm.

[00:36:12]>> So, if you own 10% of the units, you own 10% of the market value.

[00:36:17]>> Mhm.

[00:36:17]>> Think of it, they are shares of stock.

[00:36:19]>> Right.

[00:36:20]>> If I own 10% of a company it's worth $100 million, I I have $10 million. Mhm.

[00:36:25]Uh the problem is and uh a famous uh, real estate attorney mentioned this in in the real deal article that boards don't have the authority to do what the city wants them to do, the co-op boards. You know, they're going to have to amend their proprietary leases because the question is me and Martha live in the same co-op. I have pied-a-terre tax liability. I don't pay it.

[00:36:49]Who pays? The co-op pays. Right? Because that's who they're billing. I don't own real property. The co-op does.

[00:36:56]>> So, I don't I I I I think I think, um, some of this is a little overstated because some of the proprietary leases >> overstate it?

[00:37:04]>> Not you. Um, uh, uh, I I I I was going to say just some co-ops can implement this with no problem whatsoever. Others, I'm not not I shouldn't say no problem whatsoever. It is concerning how the co-ops are going to do this because as you said, ultimately the building's liable for the tax, right? But, um, I don't know that the proprietary lease in all buildings would limit a co-op's ability to actually collect this amount. So, for example, co-ops are doing all kinds of things in terms of the co-op condo abatement, right? If you aren't it's not your primary residence >> necessarily giving the money to the you know, back to the people >> That's right. I just got my annual co-op letter where the board said, "We're keeping the money from your co-op condo abatement even though there's two or three people in the building who aren't entitled to it, they're going to actually have to pay, but you're going to have a slightly lower, um, you know, sort of maintenance this this time." So, the So, co-ops are accustomed to at least saying, "You, Greg, have to pay more because it isn't your primary residence and um, others don't." So, I I do think that part is slightly, you know, do they have the, um, authority under the proprietary lease to do it or not, um, a little bit overstated.

[00:38:24]Nonetheless, it is an issue for co-ops if people don't pay it, um, because it's going to ultimately be shared among the people for whom it is not a pied-a-terre. And so, um, that needs to be worked out and ironed out in some, um, some way, um, in the rules. And, you know, it's great that the city's hiring the co-ops as their collection agents, um, on some level, but it's >> It's as if managing agents don't have enough to do and, you know, >> you know. Um, so, yeah, it's going to be it's going to be very, um, interesting to see how that sort of plays itself >> There's a couple of other interesting things here. Number one, will co-ops change their rules to either limit pied-a-terre ownership or increase subletting or both.

[00:39:09]You know, because if they don't want to deal with this potential issue.

[00:39:13]The other problem and and we're not going to know this for 2 years. So, you're going to go from the market values uh, based on rental comps to actual sales-based approach evaluation.

[00:39:27]What is that going to do to taxes for property? What does that do to Ken Griffin's property? What does that do to co-op units?

[00:39:33]>> So, you know, it's again, I mean, I think all of this is very complicated.

[00:39:38]Although, most people have always sort of said, well, you should use sales prices for co-ops and condos, um, to begin with, right? That that's that is, you know, a better way, um, to value. I actually think that there are three ways to value. You can use cost, you can use sales, you can use income.

[00:39:54]All legitimate ways to value. The question on the income side is use the right income estimate. Don't use an estimate that's too low. Um, and, you know, used to be that, at least I was taught by mentors that those three should reconcile themselves. So, a couple of things to remember. So, when you say use sales price, I don't think that, um, the sort of goal is, "Oh, by the way, let's lift everybody in um in Ken Griffin's building up to 238 million or at least 230 8 million based on whether square footage or some other sort of thing.

[00:40:29]I ask myself, is the Ken Griffin sale a a sale between rational buyers and a rational seller, right?

[00:40:37]>> Well, I think everybody's rational. They have to be to have that much money.

[00:40:40]>> Well, I I just I mean, I just mean that that's not how market value is defined for property tax purposes. And so, that's going to come into play. I mean, I might just say, well, you know, maybe Ken Griffin wanted to have the highest market value kind of in the city in the country, and that's why he bought that.

[00:40:57]But, in any event, all of that to say, the city is going to have um some work to do in order to convert or calculate these market values. And the question is, are they only calculating it on the units that are pied-a-terres? Or, you know, as you said, for the co-op, they have to do it on the whole building.

[00:41:17]>> So, how do they get that value for the whole building? What do they know about the units other than the shares? They They don't.

[00:41:23]>> know shares. They know some stuff about the building, but um you know, again, I'm I'm not saying this is an impossible I think it's a Herculean task. And the notion that they should have this ready to go by January of 2028 is really asking um volumes um from an agency that um doesn't, in my opinion, even follow the law that's laid out that says assessment should be uniform.

[00:41:54]>> Right.

[00:41:54]>> You know, and that you can value co-ops and condos even using market rent. So, it's going to be a Herculean task, and we'll see um um how they how they do.

[00:42:03]>> And and as we get more information, you know, we'll continue continue to give you answers to hypothetical questions.

[00:42:10]Uh and if you do have any rule changes or any things you'd like to get cleared up, you can send him to [email protected].

[00:42:20]We'll forward them to Martha, she's better at this stuff.

[00:42:22]>> Great, calls me all the time. I just also should say that, um, uh, in the next day or so, I kind of created a little bit of, um, a tool that people can use where, again, I this is not legal advice, it's just a tool that can help you kind of take a look at, uh, couple things. One is, am I likely to be hit up with this, um, but second, also takes a look at, um, well, you know, is it your primary residence? And then, if you say no, here are some things that you can do. But even if you say yes, here's the documents that you could try >> You don't need to know anything about about how this law works cuz it's asking you the right It's It's kind of like what TurboTax does when you do your taxes.

[00:43:06]Do you own one of these? Do you have Do you work in Yonkers? Like That's always my favorite question.

[00:43:11]>> it's going to launch, um, um, actually in two places, um, one on the Real Estate Board of New York's website, but also on my, um, little small law firm's website, starkpatchlegal.com.

[00:43:23]So, um, stand by for it, and, you know, feel free to use it if it's helpful.

[00:43:27]>> Yeah, and, you know what? The there's still until those letters go out at the end of August and say, "You owe this much money."

[00:43:38]Uh, we're not going to have a definitive answer, but the guidelines that we have give us enough information to have a pretty accurate amount.

[00:43:46]>> Yes, absolutely.

[00:43:47]>> Um, specifically with the with the single families and condos, that that we can pretty much be sure of. It's the co-op and cuz there's commercial space in co-ops, and that could have a little factor or not on on what your percentage of ownership is.

[00:44:04]>> Yeah, I I you know, share allocation is really complex. It's not as easy as people think. Some people do it based on square footage, but, you know, if you're in a very high floor with a fantastic view, your market value might be a lot higher, but your share representative might be much um sort of uh lower. So, it's sort of interesting um especially because as developers decide how they're laying out shares or, you know, um common area percentages, it it does it's going to have a huge impact on how this works.

[00:44:36]>> And, you know, there's always the uncertainty. You know, now this bill, I think we saw the actual bill like 2 days before it was passed and signed.

[00:44:45]Uh and you know, the rules have just come out, but everything has happened so quickly even though this has been going on for like the better part of a decade.

[00:44:53]>> Right.

[00:44:54]>> And we were able to convince the last go round in 2019 that this was a bad idea for a variety of reasons. Number one, it's an a very avoidable tax.

[00:45:06]And you know, the the revenue it's going to raise is very unpredictable because you know, when you when it's top weighted, although it's not as bad as I think the original bill where Ken Griffin was going to pay a couple percent just by himself.

[00:45:21]I think that you know, the the they're they were looking for a half a billion and then the controller looked at this and said, maybe as little as 340 million or so.

[00:45:33]And then they put out this thing now that it's going to it could raise, you know, a billion dollars.

[00:45:40]And then it's the fine print that doesn't show up fast enough because it's this idea of a notional amount. I have notions all the time, but it's not about a hundreds of millions or billions of dollars.

[00:45:54]>> Yeah, well, you know, it I do think that um that there were some shifts that were a little bit surprising. I I think that the burden now is really on the taxpayer to sort of say this is really my primary residence, right? Um before the assumption was things like for example, if you receive the co-op condo abatement, that you would be presumed it would be a presumption that it's your primary residence. Um if you receive most um folks at this level don't get the star exemption or senior citizen exemption or anything kind of like that.

[00:46:30]But if it was held in your own name, there was an assumption that that's probably your primary residence. Um and then there were even some LLC tests, right? So um one of the areas that we were concerned about is if you own as an LLC, are you actually presumed that it's not your primary residence? And that's why the LLC rules were actually probably the best part of this bill because they at least sort of gave an avenue for even an LLC um to get this um sort of >> It's It's a good point, too, about the co-op condo abatement. If you're receiving this, that does not mean you automatically it's your primary residence. And if you own an LLC, it doesn't mean automatically it's not your primary residence. You know, so the whole idea of natural person comes in. Right. Uh and the this is stuff that, you know, people make Finance has always done it that way." But the bill actually did talk about LLCs and trusts and and what the required requirements had to be. I think it's it's interesting though that they It's like, "Well, you know, we think based on how many properties we've identified that it could raise as much as a billion dollars." And it's like, "Wow, a billion dollars, that's like that's that's a lot of of money." And it's like, "Or as little as, you know, 340 million dollars."

[00:47:48]>> I know it. I mean, and I think that that's correct because um and and the shift to me is the burden's now on the taxpayer to show >> until proven innocent, >> Martha. I don't think that's what they taught in law school.

[00:48:00]>> That's um well don't know. Let's let's not do the law school thing.

[00:48:06]Um but but no, it's it's a real dilemma.

[00:48:08]And so it creates an administrative burden that's going to be costly for the city to sort of figure out and to have them have people come forward. I I just will say the tax commission still deals in paper, right? I mean they're a paper driven. You file your application, it's in paper. Um and so the notion that that they're going to be able to do these primary residence challenges is yeah, it's really interesting. And they said if they don't think that they actually need to issue any rules or regulations about it.

[00:48:40]>> Nice work if you can get it sometimes.

[00:48:42]Uh so yeah, and and so over this 10 years all the almost that we've been fighting this test it it's funny.

[00:48:50]It we were able to make a good argument to an administration that was listening you know, in 2019 saying that you know, this is not a good revenue for you because it's so unpredictable. You have transfer tax, you have mansion tax, predictable, consistent, one-time taxes that will cause an adjustment in the market. And it shows you that do people respond to tax changes? Well, just remember this, when they raised mansion and transfer taxes in in 2019, the June cuz the fiscal year ends in June, was the best June we had ever seen for closings by far because everybody wanted to get in. When the federal capital gains rates changed in the Obama administration, I believe, we saw the greatest December ever. So it's funny that some governments, you know, it's like oh, we don't want people to smoke. So we're going to jack up cigarette taxes to get you off that. Um but they don't expect the same thing may happen with with anything relating to property taxes or or levying second home taxes.

[00:49:55]>> Yeah, I think, you know, again, I don't I don't mean to excuse it. I I do think that there was and and even some of the dialogue that we're having here, there's some, you know, you talked about Ken Griffin's taxes, the mayor made a big deal about um his taxes in a way that wasn't really, you know, um so cool, right? Um uh is [laughter] the best >> It's a nice nice politically correct way.

[00:50:19]>> wasn't really so cool. But what I was going to say is that Ken Griffin's um taxes you just sort of said, "Oh, he bought it for 238 million, the city has it at 16, 17, maybe it's 19 million this year. I don't remember." Um and that that number is not quite correct is how you um sort of described it.

[00:50:39]>> more than anybody else is paying cuz that's the true question and that answer would be yes. Nobody's >> Yes, except that, you know, the property tax is a tax on value, whether you like it or you don't. It's a tax on value and that tax on value, what I would argue is should be kind of equal across, you know. Yeah, it shouldn't be Ken Griffin's taxes, you know, 2,000 per million dollars of value and somebody living in Staten Island or the Bronx is 12,000 per million dollars of value.

[00:51:11]>> rates, you know, they >> No, I'm talking about just your taxes as a percent of your value. I'm not So I'm not doing a rate. I'm just talking about take the dollar amount and say how much is that per million dollars of value.

[00:51:23]>> and when it's not >> it's not. That's the problem.

[00:51:25]>> you you've done a great job over the years proving that that that you look in these areas and, you know, it's as clear as day. And there was a review commission who issued their recommendations right before COVID. Um and again, they need a whole mess of state legislation to do that and the state's probably not too motivated to do that cuz they don't get that money.

[00:51:46]Um and then who cares? If they're getting the revenue, they're not going to worry so much about it even as your lawsuit makes progress.

[00:51:55]>> Yeah, I mean I think, you know, that's one of the issues with the property taxes. You do pay it up front and then you have to fight to get back what you're you're owed as opposed to being able to withhold >> And it's based on the value, right? Ad valorem, is that what they call it in legal?

[00:52:10]>> yep.

[00:52:10]>> And so they don't care, it's not based on your income. You know, you it's worth this. Sorry, it burnt down, you know, if that was the case. I don't want to make a joke about a house burning down, but just more emphasis on taxable status date. You know, it's like do you still have to pay?

[00:52:24]Uh, reminds me of in Goodfellas and they talk about how you got to get you got to come up with police protection money each month. Place burnt down, you get too bad, pay me.

[00:52:32]>> Oh, okay. Well, I can it to Goodfella now, huh? Okay.

[00:52:35]>> Goodfellas is a great movie. Um, it's the Sicilian in me. But, you know, people worry, you know, what's going to mean for the housing market and obviously it's going to reduce demand for luxury apartments. We don't know by how much and and luxury homes. But, it's funny what people think of luxury for one thing, you know, a lot of people may have bought a brownstone in Brooklyn or something in Queens, you know, 50 years ago for $10,000 that is now reached the threshold uh, where they they could be worth 5 million and they could be living full time somewhere else. You know, this does have impacts, but to me it's the economic impact to the city and we did some work with consulting firms to kind of prove that even if you get something from this tax, the amount of other revenues you're going to lose are going to dwarf it, you know, to an extent. And what does that mean? Well, if I'm a developer and I cater to pied-a-terre owners, um, am I going to build as many buildings? Am I going to build as many units?

[00:53:37]Uh, if I don't, then that's a loss of thousands of construction jobs, all the income tax those workers would pay, [clears throat] the property tax the building would pay, the transfer tax and the mansion taxes, all of that stuff that goes into building a building and that has a permanent effect on the area goes away and jobs that that are needed go away.

[00:54:00]>> So I think I mean one of the things that you said um at the start of the program is that it's a five-year you know, bill, right? I mean it basically sunsets in five years. And part of the reason why um at least that part was asked for is that if you say a bill sunsets, it invites the kind of conversation that you're talking about.

[00:54:22]It gives people an opportunity to look and say what has been the impact of this and whether or not it's causing the harms that you want. So if it had been you know, um uh adopted in perpetuity, then you know, I I certainly would still have those concerns, but I think there's an adjustment period, it's five years, and let's see kind of where we are. And I think the more one's able to document those changes, um the less likely is that it gets renewed. Um so that's I mean that's the hope. Again, you know, um I'm not saying that's what's going to happen.

[00:54:57]>> other side of that is it's just more uncertainty five years from now.

[00:55:00]>> Yes. Yes, it is. However, at least if it's based on actual information, people can, you know, either adjust or not.

[00:55:10]>> We had a lot of fun making those presentations to certain politicians.

[00:55:14]>> Yeah, we did. We did. Um yeah, and uh people were actually responsive in some in some ways.

[00:55:20]>> Except one very notable exception, but um who didn't care anything that we said, but uh we had cookies at that meeting if you remember. The the the certain meeting with a very uh prominent developer. Uh but is there anything we forgot, Martha, that we have to say as we wrap this great episode up.

[00:55:38]>> Oh, um hm.

[00:55:41]>> Other than we're hungry for lunch now cuz this this makes us all >> No, you know, I I just again think and want to encourage people to get you scenarios. Now, you know, don't don't give us the you know, one in 10 million chance that this is going to happen, but scenarios that they're encountering and I think it's going to be important to make sure that the Department of Finance is aware of those and all of the policy makers who thought that this was good tax to adopt.

[00:56:10]They need to be aware of the scenarios.

[00:56:12]I you know, one other thing I right now it looks to me like there are some not-for-profits that might also be subject to this tax because this I should say surcharge because the surcharge isn't looking at exemptions.

[00:56:25]So, if there are, you know, any um you know, churches who have rectories or anything that's over $5 million and a one-to-three family, they've got to be concerned as well. Universities, if they have any faculty housing that's actually above this threshold. So, really kind of important things to sort of be on the watch for.

[00:56:46]>> And and, you know, for you agents [snorts] out there or buyers or sellers, you you need legal advice here. This is not something that you can just assume, well, this makes sense or because the thing about the rules that stood out to me when I was reading them was the penalties for for providing false information could be up to 50% of the tax that you're required to pay.

[00:57:09]>> Right.

[00:57:10]>> So, there are serious consequences to you know, making mistakes or misleading or outright lying. So, you know, this is I always tell people don't come to an economist for legal advice.

[00:57:22]>> [laughter] >> Probably not for economic advice too much either, but uh you you you this is why lawyers exist and and that's why you have these professionals. Just like as a real estate agent, you're a professional and that's why you're you've been hired by your clients. So, let's all stay in our lanes and and go by what we do know. As we get more information, we will share it.

[00:57:42]You know, the I guess the next big part is when these letters actually start going out. And I wonder if those are going to be public. I guess not.

[00:57:52]But when the January bills come out, then it will be public.

[00:57:56]>> imagine that they they are going to have to make it public. I mean, one of the suggestions that we certainly have or we are drafting is from a transparency perspective, they should be either adding columns to the assessment role that tell us, you know, we've determined this is the primary resident, this one is actually going to you know, even the shares, how many co-op shares they think there are in these units. They they have to provide a lot more transparency so people can actually double-check to see whether or not they're doing this the right way.

[00:58:29]And that that should really be a requirement.

[00:58:32]>> Well, thank you so much for coming on the show. Again, it's been a while since we've had you and we're going to have you on more frequently cuz I get tired of Scott and Shara after a while.

[00:58:39]They're all right guys, but you know >> Promises, promises.

[00:58:42]>> Well, I I did promise you lunch and we will be getting to that shortly at at [music] Canaletto, my favorite place to eat in New York New York City.

[00:58:50]>> Excellent.

[00:58:51]>> Ray loves the mushroom pasta. He you know, he doesn't eat meat, but we're going to be eating meat when we get there.

[00:58:56]>> All right, sounds good.

[00:58:57]>> But thanks again. Thanks to Ray and Lena.

[00:58:59]>> Yep.

[00:58:59]>> Thanks to all of our sponsors and of course to all the listeners and viewers out there. We love each and every one of you. Have a great championship week celebrating our beloved New York Knicks.

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