New York City Pied-à-Terre Tax Takes Effect July 1

Signed into law by Gov. Kathy Hochul as part of the state budget, New York City’s new annual surcharge on high-value nonprimary residences (commonly known as the pied-à-terre tax) takes effect on July 1. During the initial phase of the tax, it will apply to one- to three-family homes with market values of at least $5 million and condominiums and co-ops with market values of at least $1 million that do not serve as “primary residences.” The tax is projected to generate approximately $500 million annually from roughly 11,000 properties.

Tax Rates

The tax employs a two-phase rate structure. In Phase 1, residence values will be based on current values assessed by the Department of Finance (DOF) for property tax purposes, and in phase 2 (starting on July 1, 2028), residence values will be based on sale prices for comparable properties. In both phases, one- to three-family homes valued at between $5 million and $15 million will be taxed at 0.80%; properties valued at between $15 million and $25 million will be taxed at 1.05%; and properties valued at more than $25 million will be taxed at 1.30%.

For the fiscal years beginning on July 1, 2026, and July 1, 2027, condo and co-op units valued at between $1 million and $3 million will be taxed at 4%, units valued at between $3 million and $5 million at 5.25% and higher-value units at 6.5%. Beginning on July 1, 2028, condo and co-op units valued at between $5 million and $15 million will be taxed at 0.8%; units valued at between $15 million and $25 million will be taxed at 1.05%; and higher-value units at 1.3%. For the fiscal years beginning on July 1, 2026, and July 1, 2027, individual unit value will be determined by multiplying the co-op corporation’s total market value by the shareholder’s percentage of shares. Beginning on July 1, 2028, DOF will provide values directly to unit owners rather than imputing value based on share percentage.

Primary Residence Determinations and Carve-Outs

Under the law establishing the tax, a property qualifies as a primary residence if a “covered owner” (as such term is defined in Section 1351(d) of the New York State Tax Law) occupies it for a majority of the days in a calendar year. This standard differs from the existing statutory residency test used for income tax purposes, which requires spending at least 184 days per year in New York State or New York City. Most notably, the tax differs in that its test hinges on use of the specific property, not merely presence in the city or state.

Under DOF’s proposed rule, DOF will make an annual initial determination as to whether a covered property is not a primary residence. Unless credible information indicates otherwise, DOF will determine that a property is a primary residence if the covered owner listed it as a permanent home address on their most recently filed state or federal income tax return or received certain real property tax exemptions (e.g., School Tax Relief (STAR), veterans’ exemptions or senior citizen exemptions). If DOF cannot make an initial primary residence determination from tax return data, it may rely on other available information, including whether the owner occupied the property for a majority of the days during the prior calendar year and whether the owner indicated the property as a permanent residence in other documents previously submitted to the city.

The law provides carve-outs allowing a property to qualify as a primary residence even if the owner does not live there, such as when an immediate family member resides there or when the property is leased for at least one year. If property is leased to a third party on arm’s-length terms and the lessee occupies the apartment as his or her primary residence, the tax will not apply.

The rules governing residences owned by entities such as partnerships, limited liability companies (LLCs), trusts and estates are not entirely clear. For example, the new law provides that owners of interests in corporations, partnerships and LLCs that own residences are considered covered owners, but only if they hold majority interests in such entities. If a couple each owns a 50% membership interest in an LLC that owns their primary residence, it is not clear whether the property is exempt from the tax. Co-owners in this situation may wish to consider transferring a portion of their interests so that one owner holds a majority interest in the LLC. That owner would therefore qualify as a covered owner and their use of the property as a primary residence should result in the property being exempt from the tax.

For a property owned by a trust, the law provides that if the trust beneficiary occupies the property as a primary residence, the beneficiary is a covered owner, but only if the beneficiary is the sole beneficiary of the trust. Very few trusts have only one beneficiary, so it remains to be seen whether “sole beneficiary” will be interpreted to mean “sole current beneficiary” or if it will be given a more literal meaning. There is little guidance on the taxation of residences owned by estates, although the law seems to dictate that a property vacant during the administration of an estate is subject to the tax, whereas one that is occupied as a primary residence by an estate beneficiary or a tenant under a bona fide lease would not be subject to the tax.

Appeal of Primary Residence Determinations

Under its proposed rule, DOF must transmit notice of its initial primary residence determination to each covered property owner no later than Jan. 30 of each year, except that for the first fiscal year (beginning July 1, 2026), notice must be transmitted by DOF no later than Aug. 30, 2026. Owners may file an appeal within 30 days of transmission of the notice. The appeal must include a certification that the property is used as a primary residence, along with the required documentary proof. Failure to file an appeal or provide proof constitutes a final determination not subject to further challenge, unless the owner has challenged the determination before the Tax Commission.

The proposed rule also specifies acceptable forms of proof for appeals, including (1) a copy of the most recently filed state or federal income tax return listing the property as a permanent home address, or (2) two or more of the following, provided they reflect residency on or before the taxable status date: (a) a photocopy of an unexpired New York State Department of Motor Vehicles driver’s license, learner’s permit or nondriver ID card showing the property as the holder’s residence; (b) a voter identification card issued by the New York City Board of Elections; or (c) other proof of primary residency deemed acceptable by DOF. For example, phone records may establish presence in the city but will not necessarily prove occupancy of a specific residence.

Audits and Penalties

DOF can conduct audits to determine the surcharge owed, including any determination relating to primary residence and any certification or documentation of primary residency submitted to the department (provided that any audit of such certification or documentation shall be conducted within six years of submission thereof), and may subpoena witnesses and require production of books, papers and documents.

DOF may impose penalties where a certification or documentation contains inaccurate or misleading information that is material to the surcharge determination and was submitted negligently or in bad faith, or where a condominium property has been divided into more than three units to avoid the surcharge in bad faith. If the misleading documentation would result in full exemption from the surcharge, a penalty of 50% of the applicable surcharge will be imposed in addition to reinstatement of the surcharge. If the documentation would result in a lower valuation, a penalty of 300% of the difference in surcharge, capped at 50% of the surcharge that would have been calculated, will be imposed.

Within 30 days of receiving a notice of penalty from DOF, property owners may petition for a hearing, which may be conducted by mail, by webform, in person or by electronic webcast at the petitioner’s request.

What Should Property Owners Do?

Many aspects of the enforcement process in connection with the tax remain unclear despite the issuance of DOF’s proposed rule. Owners of subject properties should consult counsel regarding the appropriate documentation for contesting a primary residence determination or for establishing occupancy or tenancy by a third party. Additionally, co-op corporations should ensure that their governing documents contain procedures for recouping the tax from affected unit owners, as the tax will be imposed against the co-op corporation.

DOF has released a proposed rule for implementation, with a public hearing scheduled for, and a public comment period closing on, July 9. Comments may be submitted on the New York City rules website, by email to DOFRules@finance.nyc.gov, or by mail, fax or oral testimony at the hearing.