First introduced in NY State’s legislature five years ago, a pied-à-terre tax is receiving renewed attention as a direct reaction to the recent $238M sale at 220 Central Park South. The state seems to be scrambling to fund coffers to pay for a host of capital projects, following New York’s ill-fated Amazon loss and delayed efforts to monetize the legalization of marijuana and casino gambling. In late January when Ken Griffin, CEO of Chicago-based Citadel and billionaire philanthropist, closed on the highest ever recorded transaction in New York, the aha moment came. With homes in Chicago, Florida and London, among others, Griffin will be a part-time city resident so he will not pay city and state personal income taxes. Nonetheless he will be adding to our local economy and bringing jobs, expanding his company’s footprint with the leasing of nearly 60% of the office tower at 425 Park Avenue which is due to open by 1Q2020. Griffin’s astonishingly high tier price tag of a new development condominium comes at a time when high-end sales have been sliding steadily downward for the last two years. If passed, the pied-à-terre bill will further damage an already ailing luxury market.
Initiated by Democratic Senator Brad Holyman in 2014, the tax on pied-à-terre residences would apply to second homes or investment properties worth $5 million and more. Unlike the current mansion tax which is a one-time one percent charge payable to the state upon the closing of properties valued at $1M and more, the pied-à-terre tax is positioned as a recurring sliding scale levy payable annually and based on property values; the proposal being floated starts at 0.5% for properties worth $5-6 million and increases to a cap of 4% for properties worth $25 million and more. Although full details of the bill remain unspecified, budget hearings will be occurring in the next couple of weeks proceeding April 1st when the new budget is due. The bill is supported by Governor Cuomo, Mayor DeBlasio and Democratic state legislators who are pushing hard to tax wealthy absentee owners.
Of the 75,000 pieds-à-terre in NYC tallied by the New York City Housing and Vacancy Survey in 2017, approximately 5,400 were sold for $5M or more. The Fiscal Policy Institute estimates a pied-à-terre tax would generate $660 million annually. The revenue would begin to address an array of local problems ranging from a failing MTA infrastructure and poor transit servicing to developing affordable housing.
Other cities around the world tax secondary residences. A report in spring 2018 from Real Estate Institute of British Columbia on “Non-resident Property Ownership Around the World” observes Vancouver, Sydney, Paris, London, Singapore and Hong Kong have all recently added or increased taxes on secondary home purchases. Vancouver began taxing these purchases by foreigners at 15% in August 2016, and then less than 18 months later, the tax was increased to 20%. In Hong Kong, non-permanent residents pay a 15% fee, and foreigners pay an additional 15%. Singapore charges foreigners 15%. From what I have gleaned, these surcharges are one time fees and do not recur annually.
Talk now about a pied à terre tax during tax season seems particularly ill-timed as we’re still dealing with the full after effects of Trump’s recent reforms which limit state and property tax deductions to $10,000. Come April 15th some taxpayers in highly taxed states such as New York may be rudely awakened. Will an additional pied-à-terre tax—especially one that recurs annually—further push non primary residence owners out the New York door? Will they look to move to lesser taxed states like Nevada, Texas and Florida?
The pied-à-terre tax as it's been proposed is ill-conceived, ill-balanced and shortsighted. A recurring payment based on value fails to acknowledge market fluctuations. Is it fair or even reasonable to charge the purchaser of a $238M purchase the same capped $1M rate as the purchaser of a $25M property? Should a tax on non primary residences distinguish between U.S. out-of-towners and foreign nationals, the former who look to spread their wealth and take advantage of New York’s cultural and philanthropic attractions and the latter who look to New York real estate as a safe haven for their capital flight? The pied-à-terre tax as it’s been proposed will negatively impact high-end sales and will actually hurt the city and state by reducing sales and generating less tax revenue. Affluent and well-heeled buyers will have second thoughts about big apple real estate purchases, and transactions will stall. An already glutted inventory of high-end properties will become even more saturated. Real Estate Board of New York president John H. Banks observes, “We are very concerned it’s going to have a huge chilling effect on high-end co-ops and condos.” If New York is “open for business” as our Governor recently asserted, then New York luxury real estate opportunities ought not to be unfairly taxed.