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 aren’t limited to ownership rates, either. Like the rest of the United States, New York has its single-family homes and its row houses. It also has condominiums, in which individuals own their apartments while the common areas are shared. But, to a degree unprecedented in the rest of the country, New York’s housing stock also includes cooperatives.

Cooperative 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 the owner honors the lease . op rules

In many parts of the United States, the rules that 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, which often denies that approval and is not required to give any reason for doing so. During the housing recession, some cooperatives 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 didn’t want to acknowledge that their own homes had fallen in value. When a cooperative approves a sale, it also often diverts 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 detest the paparazzi and the onlookers they might attract.

You’d think the city would give co-op owners a break, considering all the hassle that comes with this quirky New York institution. But you would be wrong. In reality, the structure of the New York State property tax system penalizes co-op and condo 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. New York is, by the state’s own choosing, 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 co-op and condo owners, both in the city and its suburbs, where most of the rest of New York’s multifamily housing is concentrated. This relief came in the form of tax relief 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 the owners of the units. Most of the cooperatives pocketed the abatement money, but since the abatement helped defray building maintenance costs, unit owners still benefited.

Now, however, the state has tightened eligibility rules for the reduction in a way that will likely trick many ill-advised homeowners into paying state and local income taxes that will cost far more than the reduction is worth.

On the other hand, the new rules will likely mean more business for New York probate attorneys. Given the way the New York Legislature operates, aggressively seeking maximum revenue while doling out favors to well-connected interest groups, these byproducts of downsizing reform are probably 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 their 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 a primary residence.

Many second-home owners likely 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 is a move that I am sure many will regret.

The property tax exemption can be changed or canceled at any time. However, under New York’s draconian income tax policies, it is very difficult to give up membership in New York’s highly taxed “residents” club. 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 list your apartment as your primary residence, New York State and New York City will treat you as a resident and you’ll pay income taxes to both of them on all your income. If you still spend most of your nights in Connecticut, that state will also treat you as a resident. 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 house in Connecticut, but keep the apartment in New York. 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 declared New York to be his domicile, the Empire State Building will continue to treat him as a resident even if he is only there a few days a year. The state system for adjudicating tax disputes 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 put their properties into trust or limited liability companies to avoid the cost and public exposure of probate. The new property tax reduction rules will lure some unsuspecting homeowners into New York’s probate system. In addition, direct ownership of real estate will also attract some out-of-state owners to the New York estate tax system.

Do you have to apply 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”

Leave a comment

Your email address will not be published. Required fields are marked *