Breaking Down DOF’s Proposed Pied-À-Terre Tax Rules

15 minutes read

Mayor Zohran Mamdani’s pied-à-terre tax — his early effort to deliver a core campaign promise — is poised to take effect next month. But the devil is in the details.

Implementing the surcharge on second homes with market values higher than $5 million won’t be an easy task, as the city’s Department of Finance and the homeowners subject to the tax are likely to clash over a range of issues related to residency status, valuation and rule compliance.

The DOF released proposed rules Tuesday detailing how the tax will likely roll out when it lands on July 1, applying a surcharge to class one residential properties, co-op units and condos that aren’t used as primary residences by owners, their family members or tenants.

The proposed rule text also provides more clarity on how the agency plans to adjudicate appeals of pied-à-terre status, calculating market value for co-op units and how homeowners will be notified that they are subject to the surcharge.

The proposal also seeks to prevent “gamesmanship” among owners by barring individuals who hold a controlling interest in a business that holds a fractional share of a property from receiving a primary residency exemption.

If implementation goes to plan, it stands to bring in a good deal of money. New York City Comptroller Mark Levine’s recent report on the tax projects revenues, well above a $500 million initial estimate, exceeding the revenue goal by as much as $160 million, for the amount the surcharge could generate for state and city coffers.

The stronger outlook, based on a clearer set of estimates of how many units will be eligible, totals more than 13,586 units that could bring revenues up to $1 billion in the unlikely event that owners don’t take steps to avoid the surcharges or file challenges en masse.

Compliance challenges

The DOF is prepared to impose a penalty amount equal to half of the surcharge on those who submit inaccurate documentation to secure an exemption from paying the pied-à-terre tax, while also reimposing the levy itself.

Homeowners who attempt to reduce the amount they would pay for their specific unit by submitting misleading information to DOF would be penalized 300 percent of the difference between the amount calculated using that documentation and the true surcharge, up to 50 percent of the total amount.

The text of the pied-à-terre tax focuses on penalty logistics while leaving other key questions unanswered, according to Benjamin Williams, who leads the property tax department at Rosenberg & Estis.

“I was a little sad that it seemed so much of the rules and the rulemaking was dedicated to ‘how do we penalize owners for submitting bad information to us and audit them,’ as opposed to helping them get through proving primary residency or how co-ops can handle the notifications, the billings and the implementation,” he said. “By not making it a little bit more comprehensive, you’re leaving a lot open to possible litigation and disputes, and just gray areas that people don’t know anything about.”

Compliance may prove to be an uphill battle for homeowners caught flat-footed when the rule takes effect with retroactivity to Jan. 1, 2026.

“It’s coming quick, by August 30 they’re going to need to send notices to people who they think do not maintain their place as a primary residence,” Timothy P. Noonan, partner at Hodgson Russ LLP, said. “How that process plays out is going to be fascinating, because you have 30 days to prove primary residence status that can sometimes take a year to do in the course of a regular residency audit.”

Homeowners looking to challenge pied-à-terre surcharges can appeal directly to the city’s Tax Commission or DOF to review and approve documentation that proves whether an owner or co-op shareholder qualifies for an exemption based on primary residence status. Proof of primary residence can be shown by submitting the most recently filed state or federal income tax return, or a combination of two documents including a New York state driver’s license or ID card, voter identification card or other demonstration of residency deemed acceptable by DOF.

Co-op woes

The new tax may come as a shock to many co-op owners. Shareholders in co-ops are likely to find that the valuation standard that determines eligibility applies to their units, even if they think they assume it falls short of the $5 million mark, according to Rebecca Poole, director of membership at the Council of New York Cooperatives and Condominiums.

“We had our regular small building discussion group, where board members get together, probably five board members in the group of 20 that were there on the call discovered that their apartments in the co-ops fell into this market value threshold and they were surprised,” Poole said. “Because the law is going to be applied retroactively, in essence, there’s nothing that they can do. There’s no phase-in period here.”

Awareness of the tax and its scope is likely to be a sizable hurdle early in its implementation, as some shareholders discover they are subject to the surcharge due to statutory language that dictates a co-op unit’s value to be calculated as a fraction of the building’s total market value based on shares owned.

“We’re going to recommend that the buildings attempt to contact the shareholders, possibly even in advance of the DOF notice going out, to try to give them the best possible ability to provide the information they’ve requested to prove that it’s a primary residence, that it’s being sublet, that it’s a trust, or that a family member is living in the apartment,” Poole said. “But it’s possible that the shareholder simply doesn’t find out that this is due, these notices are going to be mailed out during the summer, when people might be away.”

Stuart Saft, leader of Holland & Knight’s New York real estate practice group, sees more fundamental pitfalls arising from the city’s reliance on co-op boards to serve as a collection agent or otherwise cover shareholders’ outstanding second home tax payments.

“The boards do not have the authority under their corporate documents to do what the city wants them to do, so every co-op corporation is going to have to amend its proprietary lease and its bylaws, and get a two-thirds vote of the shareholders, in order to meet the requirement,” he said. “It’s going to have a terrible impact on the co-op and condo market in New York.”

“Shock to luxury real estate”

The second home surcharge is poised to significantly increase the overall tax paid on second homes, according to Ana Champeny, Vice President for Research at the Citizens Budget Commission.

But it’s likely to come as a shock to many New York City homeowners.

From an administrative point of view, Champeny said, the implementation is going to be difficult at best.

“The city hasn’t taxed at this level,” she said. “If you look at the rates for the one-, two-, three-family homes, they’re between 0.8 percent and 1.3 percent, above the median and potentially above the maximum tax rate in class one. So you are essentially going to double people’s taxes.”

“It will be a shock to the luxury real estate market,” Champeny said. “To some extent this is a test of how much of a deal New York City property taxes really are at the high end. If there’s not a whole lot of change and people are just willing to absorb a doubling of their property taxes, that says something about our underlying property taxes too.”