In episode 57 of How Tax Works, Matt Foreman discusses New York City’s brand new Pied-a-terre tax, outlining some of its most interesting points and potential audit issues.

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How Tax Works, hosted by FRB Partner Matthew E. Foreman, Esq., LL.M., delves into the intricacies of taxation, breaking down complex concepts for a clearer understanding of how tax laws impact your financial decisions. Through this, listeners are treated to a comprehensive breakdown of entity structures, from the robust shield of C corporations to the flexibility of partnerships and LLCs. Foreman navigates through the maze of tax considerations, shedding light on entity-level taxation, shareholder responsibilities, and nuanced tax strategies. Foreman shares valuable insights and practical advice, emphasizing the need for informed decision-making and consultation with tax professionals. From qualified small business stock to state and local tax considerations, no stone is left unturned in this illuminating exploration of tax law and entity selection.

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Transcript:

**This transcript has been prepared automatically by AI and may contain inaccuracies**

Matthew Foreman [00:00:11]:
Welcome to the 57th episode of How Tax Works. I’m Matt Foreman. In this episode, I will discuss New York City’s suddenly famous Pied-à-Terre Tax. How Tax Works is meant for informational and entertainment purposes only. This may be attorney advertising, and it is not legal advice. Please hire your own attorney. How Tax Works is intended to help listeners navigate the intricacies and complexities of tax law, regulations, case law, and guidance to demystify how taxes shape the financial and business decisions that we all make. Before I get started, a few administrative things.

Matthew Foreman [00:00:45]:
New episodes every 2 weeks. The next episode, we’ll talk about the imposition of penalties under 6039 cap F for late or non-filed 3520s. and how it extends this to later non-filed 3520-8s, 5471s, and 5472s. If you don’t know what those are, then you should really listen to this. If you do know what those are, then you should listen to it. To me, it’s going to be an interesting one. If you have any questions, comments, or constructive criticism, you can email me at my FRB email address. I have upcoming webinars.

Matthew Foreman [00:01:14]:
For those of you who’ve listened to this for a while or have dealt with me before or whatever, know that I do generally twice a year, although it didn’t, didn’t happen come this spring. I do 2 sets of webinars. I generally do 3 or 4. This year I am actively antagonizing our marketing folks who do all the actual work and heavy lifting. And I am doing 6 in a 7-week span. Okay. The topics and dates. Before I get into that, there will at some point be a page that allows you to sign up for it.

Matthew Foreman [00:01:48]:
It doesn’t exist yet. For one extremely specific reason, and that reason is really, really easy for me to explain. It is that I have not given them the information they need to create the signup pages yet. But this is not going to come out for a week, so it’s entirely possible come out by this one. If it isn’t out by the time this one actually— this episode actually comes out, it’ll be out by the time the next one comes out, again every 2 weeks. If you really have questions, you can email me or you can connect with me on LinkedIn. And I promise you I will post about it probably far too much. Anyway, dates and dates, they’re probably all going to be noon or 1 PM Eastern time.

Matthew Foreman [00:02:26]:
I’m in New York, so everything’s Eastern time in my head. But anyway, November 3rd, passive activity loss limitations. That’s Section 469. November 10th, selling a business, which is both tax and non-tax considerations. November 17th is payroll taxes. So that’s SOROBAN, Sirius, talked a little bit about S corps too. Skip a week, we’re gonna get past Thanksgiving. December 1st, Opportunity Zone 2.0.

Matthew Foreman [00:02:50]:
Hopefully we’ll have some regulations to analyze by then. If not, we’ll just talk about that. That should be about an hour. Um, they’re all, they’re all like gonna be an hour. December 8th is the QSBS update. Hopefully we’ll have some updated regulations. I, I believe the Treasury said they were working feverishly or something like that on it. I don’t remember what.

Matthew Foreman [00:03:08]:
We have some regs. And December 15th, closing it all off, granting equity to employees. As I sort of have said, you know, if you’ve ever seen them before, I joke that they’re giving me a lot of caffeine and let me go for an hour. Always encourage questions. And 3 of them, the selling a business, Opportunity Zones, and granting equity to employees, I’m going to split with one of my colleagues. 2 of them are tax folks. The last one’s actually an exec comm folk. And the first one, the selling a business, one of our corporate partners.

Matthew Foreman [00:03:34]:
So really excited. It’s going to be a very different kind of dynamic for them. All right. New York City’s Pied-à-Terre Tax. The people fight over this. I appreciate that I live in New York City and I don’t own 2 homes, so it doesn’t bother me that much. And maybe one day it will. People say, you know, one day this will bother you.

Matthew Foreman [00:03:55]:
And I don’t know, maybe I’m just unbothered on this stuff. The background’s really kind of interesting. You know, New York City has a lot of non-residents who are here for periods of time. You know, look, I appreciate that I am extraordinarily biased in my opinion on this, but I think New York City is a pretty amazing place. Even people who don’t particularly like New York City, don’t live here that much, will admit it has a lot of really cool stuff. But the idea behind the pied-à-terre tax is basically to tax people who can’t vote, because if you can’t vote, right, you can’t, you know, cause you— if you can’t vote and you dislike a tax, there’s not a whole lot you can do other than Move to the jurisdiction and vote, right? But I think it’s important, and I’ll get to this in the basic overview in a moment, in my overview, it’s important to note that this was an extreme challenge to get this through, and I’ll walk through why. In the future, a lot of jurisdictions are going to follow. New York City is really uniquely situated.

Matthew Foreman [00:04:59]:
Obviously, largest market in America, largest city in America. Huge generator of a lot of things. Other jurisdictions are going to do this, plain and simple. Rhode Island has already done it. Don’t know the specifics of it, candidly. I saw that it happened. I gave it a skim and I moved on. If you have questions about that one, I’m sure I can figure it out pretty quickly.

Matthew Foreman [00:05:21]:
They tend not to be the most complicated taxes. For the purpose of this, I’m actually going to read from the legislation. And it’s important to know, you know, people are slagging on the mayor. I’m not going to make any political comments about it. I don’t really care. But it’s important to note that this was part of the state budget, not the city budget, the state budget, because the New York— way New York City works is there’s a lot of issues with what’s called home rule. New York City generally can’t raise its own taxes. It is limited in what it’s allowed to do.

Matthew Foreman [00:05:52]:
And this one is no exception to that rule, such that when you have a tax, this is one that the state had to pass. And then the city Department of Finance is going to implement. Okay. I thought it was really— the purpose is really interesting. And these— it opens with legislative findings and it says the residents of New York City and many who do business here contribute daily to the health and vibrancy of the city through their economic activity and the taxes they pay. However, many of the city’s most valuable homes are held as second homes, allowing the owners of those homes to reap considerable benefits from the city’s broader economy, city services, and vibrant real estate market. The legislature finds it is prudent to impose a surcharge on the owners of these second homes to maintain important city services. People say, what do you mean? I pay property taxes.

Matthew Foreman [00:06:40]:
And I point out, and this is what’s really important, people who have second homes in New York City but don’t actually live in New York City, do they pay a lot? Do they pay property taxes? Yes. Are New York City property taxes high? Yes-ish. They’re actually fairly low rates. But because the value of real estate is so incredibly high, that it’s actually a relatively low tax overall. They also don’t pay income tax. New York City income tax is only paid by its residents. What this is intended to do is create a tax that only non-residents pay, and one that does not hit all non-residents who don’t have additional contact with the Additional nexus is the idea. So they’re limiting it in a way.

Matthew Foreman [00:07:25]:
The basic overview, again, I’m going to read a little bit of paraphrasing, but largely read from the Senate bill that was passed, that recognizing that many second homes— The legislature further finds that this surcharge should be applied to second homes with values of $5 million or more when measured by the sales of comparable properties. Recognizing that many second homes in New York City have not historically been valued using comparable sales methods, the legislature finds that it is appropriate for the initial phase of the surcharge to impose the surcharge on such properties using current valuation methods and corresponding surcharge rates the legislature deems appropriate for this transitional period. What that means is as follows, and this is not a New York City thing, this is an everywhere thing. I’ve never really totally understood this, but a lot of jurisdictions use what’s called an assessed value that tends to bear very little resemblance to actual market value. And in doing so, what they create is a situation where someone who owns a million-dollar home, the assessed value is $214,000. So obviously, what they have to do is figure out how that relates to the real value. It also creates big disparities between, especially in a city like New York, between condos and co-ops, Another apartment built, you know, how apartment buildings are owned versus single-family homes, multifamily homes, things like that. I think that’s an important thing.

Matthew Foreman [00:08:46]:
So it’s— now it’s time for my overview. Okay. 1, the tax begins— I should say began July 1st, 2026. 2, is a tax on values $5 million or more. 3, there’s going to be a lot of litigation. And that’s what’s really important about this. that there’s going to be a lot of litigation. One thing I talked about a few moments ago was the basic premise that you— how hemmed in the city is in doing this.

Matthew Foreman [00:09:16]:
The city had to have the state legislature approve this. Okay. You know, there’s a lot of talk that the mayor is going to raise income taxes in New York City. He’s going to do this. New York City income taxes New York State income taxes are a maximum rate as set by the legislature. Each jurisdiction has the authority to raise them up to the rate if they’re permitted. Income taxes are limited to cities of at least, I believe it’s a million people, maybe half a million people, such that there’s only a couple cities in New York that can actually have their own income taxes. As such, there are only 2, New York City and Yonkers.

Matthew Foreman [00:09:52]:
For those who don’t know where Yonkers is, it’s in— Yonkers. It’s in Westchester County, just north of the Bronx County. So it’s just off the city. And its most famous resident, probably, possibly, definitely not of all time, but those of my generation will tell you the most famous resident is DMX, who is a rapper, for those who didn’t know. So it’s a really disparate city from New York City. New York City has a lot of very wealthy and not wealthy parts. So I think this, this tax is really limited and intentionally limited. To an extremely specific fact pattern.

Matthew Foreman [00:10:23]:
Second, you own a second home, the second home or apartment, whatever, is valued at $5 million or more. The vast majority of people, this is not an issue. If you own a home that’s worth $5 million or more, it’s your principal or primary residence. And 2, if you own a second home in New York City, they tend not to be worth $5 million. There are a lot of people who have 3, 4, 5-bedroom homes somewhere nearby, and they have a pied-à-terre in New York City. That’s a 1-bedroom or a 2-bedroom. That’s worth much less than $5 million. This is an extremely narrow set, and that’s really important in my view.

Matthew Foreman [00:11:00]:
So let’s hop into it, right? What is the tax itself? It is a surcharge, which is a property tax based on the fair market value. The tax is imposed on, in quotes, Covered property. I’ll get into that definition and other relevant definitions later. There are 2 phases. Okay. July 1st, 2026 through June 30th, 2028. 2 full years. It is imposed on properties with fair market values equal or greater than $1 million, but the rates are cut by 1/5.

Matthew Foreman [00:11:32]:
Phase 2, July 2028 or later, properties with a fair market value of $5 million or greater. That’s it. That’s what’s going on there. Pretty straight— in my view, it’s actually pretty straightforward. So I think that’s a pretty important one. Let’s keep this going. We’re not going to hit some music. I know I generally hit music at this point, but let’s keep rolling.

Matthew Foreman [00:11:50]:
So definitions. Class 1 property or Class 2 property are defined in Section 1802 of real property tax law. You ignore 1802. I’m not going to go into what those are. Okay. I think when I talk about What the covered owner is, what a covered property is, things like that. It’ll become very obvious what they’re going for. But it’s important to remember, this is pied-à-terre.

Matthew Foreman [00:12:14]:
It’s only residential. Okay. A covered owner, and the taxes imposed on the covered owner, is someone who owns— the owner of a Class 1 property, a cooperative tenant stockholder. Notice the words tenant, right? Stockholder. And 3, condo owner. It also includes the owner of a Class 1 property, cooperative tenant stockholder, or condo owner where it’s held in trust, but the benefit— only in situations where the beneficial owner— it’s imposed on the beneficial owner, but only if there’s one beneficiary. So if you have like 30 people who own a trust or beneficiaries of a trust and there’s real property, no, no, not, not, not imposed initially. Also, if the Class 1 property, cooperative tenant, A stockholder or the condo owner is a partnership, corporation, or limited liability company, then the tax— the covered owner, okay, is a partner, shareholder, or member who owns the majority interest.

Matthew Foreman [00:13:12]:
Someone asked me, we had a discussion in New York City Bar’s State and Local Tax Committee, and someone pointed out a really good point. I hadn’t really thought about it yet, but they They did. And what they said, well, what if it’s 50/50? What if 2 spouses own something 50/50, right? A, I suspect that they’re going to give an exception for that in the regs that maybe may overstep the bounds a little bit, but I think they’ll let it go. Or B, go 5149, call it a day. Unlimited spousal gifting. New York doesn’t even have a gift tax, so it can be done without tax. Not a huge issue. I think that’s important.

Matthew Foreman [00:13:52]:
The next question is, what is a covered property? So this is the property, you know, about which is done. Class 1 property but not vacant land, a Class 2 property that is a residential cooperative where at least one unit has a Phase 1 value of at least $1 million or a Phase 2 value of at least $5 million. This is Phase 1, Phase 2 for the different time periods, the 2 years and thereafter, or a Class 2 property that is a residential condominium. The next one is really actually pretty interesting, an excluded owner. An excluded owner is a Class 1 or 2 property where one of the two has happened. One is their certificate of occupancy has not been issued, or two, the condo or cooperative is subject to an offering plan but not sold or transferred yet. Okay. They also define what is an owner.

Matthew Foreman [00:14:40]:
It means title. Real estate’s actually really easy to go with, an owner. You know, what is an owner because of title? I’m not going to define title. I don’t think it’s really necessary. But, you know, what is an owner? It’s pretty obvious. How they figure out the fair market value, I’m going to skip because the details themselves probably take about 15 minutes to work through. But the big thing is, is, you know, for cooperatives, you use the fair market value of the whole building, then divide by the number of shares you own. So if you think about it, what happens— and I’m going to oversimplify this— let’s say there’s a cooperative has 2 unit holders.

Matthew Foreman [00:15:13]:
Whole building, you know, together is worth $12 million. Each one owns $5 million, right? So $6 million, $6 million. Pretty simple, right? Okay. But not necessarily. One, you know, not that it’s tall, not that it’s bigger. They could be the exact same thing. But anyone who’s ever looked at real estate generally knows that there’s a lot of factors that drive value, right? One, newer renovation. Two, better view.

Matthew Foreman [00:15:37]:
You know, New York City, you see the river, you have a view facing downtown. If you have a view facing uptown, you have a view generally, right? You’re near a park, you have keys to a park, things like that. Generally speaking, higher floors. So I think that’s one where they’re going to impose a tax and then there’s going to be litigation. I’m going to talk about the litigation later. I don’t really think it’s necessary to hit it, hit it in detail right now. So let’s get some music in and then I’m going to, I’m going to come back and talk about, you know, what is a primary residence? Okay. I’m back.

Matthew Foreman [00:16:34]:
So let’s talk about primary residence, right? So the question is whether you use— and this is an important one— the covered property as primary residence. If the covered property is your primary residence, then there’s no pied-à-terre tax. So, so that’s the question you have to prove. Oh no, no, this is my, this is my primary residence, right? So here, here are the requirements: by one or more covered owners or immediate family members of the covered owners, or by a lessee or sublessee with a bona fide lease agreement at arm’s length. So it’s either one, by an owner, by a covered owner or immediate family member of the covered owner, or 2, there’s a lease and the lease is arm’s length. It doesn’t say that you can’t have the lease with a family member. Okay. So you can have a 5th cousin or whatever, but it has to be arm’s length.

Matthew Foreman [00:17:25]:
And that’s key. I think that’s going to be a challenge. I think a bona fide lease agreement is fair, but I think the arm’s length could be a problem. An immediate family member is defined as a spouse, child, sibling, parent, grandparent, or grandchild of the covered owner. No cousins. And it’s legal relatives. So step— and so step, I think, is in. I’m not sure.

Matthew Foreman [00:17:49]:
And if you’re a, for example, a grandchild by marriage or something like that, I think that will do it. Question is whether there’s adoption, things like that. I think this is something that should be there. But candidly, I think if, like, for example, you know, a wife owns it and it’s the husband’s child who’s in it, I think that’s fine. You’re not a covered owner. I, I just don’t— I don’t see that, you know, these are not the droids you’re looking for, so to speak. So I think that one will be fine. And there’ll be regs.

Matthew Foreman [00:18:20]:
I’ll talk about regs later. That’s really important. The date for determination whether something is your primary residence is January 5th of the same year. So for example, the July 1st, 2026, that will be on January 5th, 2026, assuming I read it right, which I’m 90% sure I did. New York City Department of Revenue is going to make rules to determine what is a primary residence. You’re going to use— they told them to use general common use definitions. I think it’s going to mirror Section 121 of the Internal Revenue Code that deals with one sub— I believe they use the word principal residence for an exclusion, but, you know, same idea. And it gives one factor.

Matthew Foreman [00:18:59]:
One factor is occupied during a majority of the days during the calendar year. I’m going to talk about statutory residency and things like that later, but thought that was interesting. Notices that you are subject or potentially subject to The tax are to be sent on August 30th. I thought that was curious. August is 31 days, so I thought that was interesting. And the state legislature has specifically permitted New York City Department of Finance to promulgate more rules, giving more factors— what factors are relevant, what documentation they want to see, things like that. Good thing it’s also going to create a process for audits, and I do think there’s going to be a lot of audits. So let’s get some more music in.

Matthew Foreman [00:19:43]:
We’ll cut quickly here, talk about rates, and then I’ll bring it on home with some editorialization. Okay, so, so we’re back. The rates, the rates are kind of, you know, they’re important, right? People are like, well, whether you qualify is important, obviously, but how much you’re going to pay for houses, right? Under $5 million in value, no surcharge. $5 to $15 million is 0.8% of value. $15 to $25 million is 1.05% of value. And over, in excess of $25 million is 1.3% of value. I think that’s pretty important. Condos and co-ops, the first 2 years under $1 million, no surcharge.

Matthew Foreman [00:20:42]:
$1 to $3 million is a 4% valuation. $3 to $5 million is 5.25% valuation. And over $5 million in value is a 6.5% valuation. Then after 2 years, for the condos, co-ops, the valuations are going to multiply by 5 and the rates are going to be divided by 5. So it’s the same effective rates, but, you know, using different bases. And I think that’s important. So For a $20 million apartment, you know, it’s a lot of money, but you own a $20 million apartment. So there’s a lot of ability to pay there.

Matthew Foreman [00:21:13]:
All right. So thoughts, thoughts, I have them. This is expected to raise $500 million annually. So that’s, that’s a lot of, that’s a lot of money. They really gonna have to do this. There’s gonna be some resources behind it. My understanding that, that they expect to hire a fair number of new auditors to deal with this specific issue. Won’t be unlike New York City’s residency audit folks who do just that.

Matthew Foreman [00:21:40]:
I think it’s going to catch a lot of statutory residents somewhat accidentally. Oh, I think it’s somewhat of the underlying purpose, but I don’t think it’s the intention to catch them. But it’s going to because you’re gonna get a lot of people who are going to say, oh, you know, oh, I just have to prove that I’m, you know, I’m here more than 180 183 days, and then the City Department of Finance is going to say, okay, well, you don’t— you’re not subject to the pieta terra tax, but you’re a statutory resident. So I think that’s a really interesting one. Could pick it up. You know, the big things are, you know, again, you know, the statutory residency rules are less than 180, 184 days. So it could definitely catch people there. It also, you know, adds sort of a layer, right? You could just choose to be like, look, like, okay, I’m a statutory resident.

Matthew Foreman [00:22:28]:
I’ll, I’ll talk through some math in a moment, but I’m a statutory resident, so I don’t have to, I don’t have to pay the pied-à-terre tax. You know, that’s really important. You, it could become a choice, right? Like if an adult child lives in what used to be the primary residence, people are like, well, you know, New York City often, and New York State, they, they both audit this even in the city. And they’ll say, oh, you know, you still live there ’cause your child lives there. You’re like, well, no, but it’s not a primary residence. You know, it’s not a permanent place of abode because my kid lives there now, and it’s not a primary residence because my kid lives there now, right? So it’s a way to get out of it. So maybe there’s a lot of people who normally would have their child, you know, get a new apartment, live somewhere else. Maybe the child lives in the, you know, $20, $30 million apartment.

Matthew Foreman [00:23:07]:
Not a, not a bad gig. If anyone wants to let someone live there for free, I’m interested. We can work out a deal, I’m sure. But the choice really becomes Either a 0.8 to a 1.3% tax on the fair market value of the apartment, or the 3.876% tax on income. For those who don’t know, if you are a resident of New York City, and only if you are a resident of New York City, you pay a tax, an income tax. And it is not based on, you know, if you’re, if you, if you work in New York, you pay that. But if you don’t live in New York, you don’t pay the city tax at all. It’s again only imposed on residents.

Matthew Foreman [00:23:45]:
So I think what’s really important to say is that, you know, 3.8%, 3.876% is not a monster number, but it’s on top of the state number. So it’s a real number. What I would essentially say is that, you know, the math is really interesting. A $30 million apartment, which is an extremely expensive apartment. Okay. The math on that at 1.3% is $390,000. Wow. But if you make $2 million a year at 3.876%, you’re only at $77,000.

Matthew Foreman [00:24:21]:
If you make $10 million per year, okay, you’re at $380,000. So at $10 million per year, it’s actually less expensive for it to be your principal residence than not be your principal residence. And that’s really important, right? Because there are million apartments in New York City. There are $30 million apartments in New York City. I don’t think I’ve ever been in one of those. And they do exist. You know, there’s those super tall buildings that have, that have issues. You know, they, they have $30, $40, $50 million apartments, $60 million apartments, you know, and, and there are people who don’t live here.

Matthew Foreman [00:24:56]:
And so I think those are the ones that are looking to, you know, pick up a nice half a mil, call it a day. I think there’s gonna be a lot of valuation fights. You know, people— there are people who have a business where they’ll buy apartments, they’ll renovate them, and they’ll sell them. That actually creates a bad fact pattern because it’ll increase the value for the sale. In a lot of ways, it could become better to buy an old apartment, renovate it yourself. New York City is going to think it’s a lower value. They might not necessarily, you know, really know what’s going on. So you might just fly under the radar.

Matthew Foreman [00:25:28]:
The other thing that I have— I talked about this with the co-op. Let’s say there’s 100 shares in the co-op, right? and you own 5, and every other apartment, every other apartment— and by the way, this is going to happen— is recently renovated, but yours is not. Okay, so you’re going to run into a situation where a fixed-income senior citizen must litigate, right? You’re going to say, well, look, it has to be a second apartment, it’s worth $5 million or more. I’m letting you know that there are people who bought— it is not an uncommon fact pattern— a $300,000 apartment in 19— ’78, and now they’re sitting on a $4 million apartment, $5 million apartment. Okay, could be more. That happens. That exists. People say, well, yeah, but it has to be your second home.

Matthew Foreman [00:26:10]:
If you live there, it’s not an issue. What if you move to Florida? You know, what if you live with a child somewhere else? Is that now— is that now your second home? And so you’re going to litigate that issue. I kind of wonder if there’s going to be an exception to this, or if you just say, yeah, I’m just going to say I’m a statutory resident and therefore I live there. I wonder if by regulation the City Department of Finance is going to include that as an exception. I don’t know. I don’t have a crystal ball, but I think it’s one that’s important. That’s something we should think about. All right.

Matthew Foreman [00:26:49]:
So that was the 57th episode of How Tax Works. Hope you enjoyed it. I’ll be back in 2 short weeks with the 58th episode where I’ll be discussing the imposition of penalties under 6039 for late or non-filed 3520s and how it extends to 3520As, 5471s, and 5472s. Thank you for listening. Now for the best song of all time.