Home ownership is a relatively rare and peculiar thing in New York City. In a nation made up primarily of homeowners, the city stands out: More than two-thirds of its households are made up of those who rent, rather than own, their homes.
The differences are not limited to property rates either. Like the rest of the United States, New York has its single-family homes and townhomes. It also has condominiums, in which individuals own their apartments while common areas are shared. But, to a degree unprecedented in the rest of the country, New York’s housing stock also includes cooperatives.
Co-op buyers technically do not own real estate at all. A co-op, which is almost always an apartment, consists of shares in a corporation that owns the apartment building, combined with a “property lease” that allows the owner to occupy an apartment indefinitely as long as they comply with the lease. op rules
In many parts of the United States, the rules New Yorkers accept as part of big-city life would be seen as an almost unbearable intrusion. You cannot buy or sell a cooperative apartment without the approval of the cooperative’s board of directors, who often deny that approval and are not required to give any reason for doing so. During the housing recession, some co-ops had an informal policy of blocking sales because they thought prices were too low; Board members who had paid higher prices during the boom years did not want to admit that the value of their own homes had declined. When a cooperative approves a sale, it often also siphons off part of the proceeds through a “reverse tax” it imposes on the transaction.
Many cooperative boards limit the amount of financing a buyer can use. Some, especially in Manhattan’s prince buildings, only allow cash transactions. Some cooperatives appreciate the prestige that celebrity buyers can bring; others loathe the paparazzi and the onlookers they might attract.
You’d think the city would give co-op owners a rest, considering all the hassles that come with this quirky New York institution. But you would be wrong. In reality, the structure of the New York State property tax system penalizes condo and cooperative owners. Your property is taxed at a substantially higher fraction of its fair market value than individual homes. (In most states, tax rates are based directly on fair market value, with possible differences in rates depending on whether the property is a primary residence, a second home, or some other type of real estate. The tax system New York is, by the state’s own decision, description – Byzantine, fragmented and inefficient, as well as one of the most expensive in America.
For the past 15 years, the state has offered relief to cooperative and condominium owners, both in the city and in its suburbs, where most of the rest of New York’s multi-family housing is concentrated. This relief came in the form of a tax cut that directly lowered tax bills for most condo owners. Cooperative owners could only benefit indirectly, because cooperative property taxes are paid by the cooperative corporation, rather than by unit owners. Most of the co-ops pocketed the money from the abatement, but since the abatement helped defray building maintenance costs, unit owners still benefited.
Now, however, the state has tightened the eligibility rules for the abatement in a way that will likely fool many misguided homeowners into paying state and municipal income taxes that will cost far more than the abatement is worth.
On the other hand, the new rules will likely mean more business for New York probate lawyers. Given the way the New York Legislature operates, aggressively seeking maximum revenue while doling out favors to well-connected interest groups, these by-products of abatement reform are likely no mere coincidence.
As The New York Times reported, Gov. Andrew Cuomo signed legislation earlier this year that will restrict co-op and condo reductions to owners who declare the units as their primary residence. (2) If you own a co-op apartment in, say, Manhattan as a second home, you’ll pay a higher tax rate than if you owned a private home of equal value in Riverdale or Jamaica Estates. Those detached houses do not need to be primary residences to qualify for your favored tax treatment.
Owning a cooperative or condominium through a trust or limited liability company also does not qualify, although the city may make allowances for trusts whose beneficiaries can show they use the home as their primary residence.
Many second-home owners probably realize that filling out a form or making a phone call is a small price to pay for a tax break that could be worth a few thousand dollars a year. It’s a move I’m sure many will regret.
The property tax exemption can be changed or terminated at any time. However, under New York’s draconian income tax policies, it is very difficult to relinquish membership in New York’s highly taxed club of “residents.” You can try to get out, but they put you back in.
Suppose you have a house in Connecticut and an apartment in Manhattan. If you claim your apartment as your primary residence, New York State and New York City will treat you as a resident and you will pay income taxes to both on all of your income. If you still spend most of your nights in Connecticut, that state will treat you as a resident as well. At most, each state will give you credit for the taxes you pay on wages earned in the other, but all of your investment income will be taxed by both states and the city.
It gets worse. Let’s say you move to Florida, sell the Connecticut house but keep the New York apartment. Perhaps you spend most of your time working from your new home in Florida and only come to Manhattan occasionally for meetings or to visit friends. Having already declared New York his domicile, the Empire State will continue to treat him as a resident even if he is there only a few days a year. The state tax dispute adjudication system is heavily biased in favor of the tax collector. The only reliable way to get rid of that New York address will be to get rid of the New York home.
Owning a condo in your own name will ensure that your estate must go through the New York probate process. His will then becomes part of the public record. Many property owners place their properties in trust or limited liability companies to avoid the cost and public exposure of probate. New property tax cut rules will lure some unsuspecting homeowners into New York’s probate system. In addition, owning real estate outright will also attract some out-of-state owners to New York’s estate tax system.
Should you ask for the reduction under the new rules? Sure, if you’re a die-hard New Yorker you could never imagine living anywhere else. In that case, take what the law gives you.
Everyone else: watch out. You may not want to look a gift horse in the teeth, but if the horse is made of wood and someone leaves it outside your castle gate, think very carefully before bringing it inside.
Sources:
1) New York State Department of Taxation and Finance, “New York Property Tax System”
2) The New York Times, “Tax Cut Changes Affect Many Unit Owners”