A 2014 bill that aims to impose an additional tax on part-time New York residents—dubbed the “pied-a-terre tax”—has risen from the dead, largely in thanks to the recent record-breaking Central Park penthouse purchase by billionaire Ken Griffin.
Griffin, worth an estimated $11.7 billion and No. 45 on the Forbes 400, reportedly bought the $238 million-dollar apartment “as a place to stay when he’s in town,” according to his representatives.
The purchase drew widespread attention to the financial losses that part-time and foreign property owners can cause the city. Because many work out of state (or out of the country), these buyers aren’t subject to local income taxes. They also don’t make many local purchases, so their state sales tax contributions are minimal.
Under the bill, the transaction—now the most expensive residential U.S. real estate purchase on record—would have netted the city an estimated $8.9 million per year in additional taxes.
Following in Other Cities’ Footsteps
Originally introduced by Sen. Brad Hoylman, the pied-a-terre tax (a pied-a-terre is a home kept for only occasional use) would levy an annual tax on non-primary residences valued at over $5 million. The tax would work on a sliding scale, with a 0.5% tax levied on homes between $5 and $6 million. Fees go up from there, maxing out at 4% plus a $370,000 fee for homes valued higher than $25 million.
According to Scott Stringer, New York City comptroller, the tax has the potential to bring in $650 million per year for the city.
“If you can afford a $5 million condo as a second home, you can afford to help the city a little more,” Stringer tweeted in early February. “A pied-a-terre tax would bring in as much as $650 million yearly. That’s $$$ to fix our subways, repair NYCHA and build affordable housing.”
Vancouver enacted a similar tax last year—the Empty Homes Tax—and according to a city report, it brought in $38 million in additional funds for the city, not to mention a 15% reduction in vacant homes. Vancouver Mayor Kennedy Stewart is said to be eyeing an increase of the tax.
Other major municipalities have made like-minded moves. Paris, Hong Kong, London and Sydney have all implemented taxes on secondary homes. The taxes range widely, though. In Hong Kong, owners pay a 15% tax on the home’s value, while in Paris, they pay a whopping 60%.
Though New York already has a “mansion tax”—a 1% tax on homes over $1 million—support for the pied-a-terre bill is gaining. Following’s Griffin massive purchase, City Council Speaker Corey Johnson tweeted, “Enough. It’s time for a pied-a-terre tax. We should tax luxury non-primary residences, like this one likely will be. Are you with me?”
Around the same, Hoylman weighed in, too, saying “Billionaire oligarchs who own $238 million second homes can afford to pay a little more to sustain our subways, our schools and our city. We need a pied-a-terre tax in New York. I’m proud to have written this bill and to lead the fight in the Senate.”
According to the New York Times, Gov. Andrew Cuomo is open to the tax as well. Adam Swanson, a partner at NYC law firm McCarter & English and a longtime real estate attorney, says it’s all “a general sign of the growing wealth divide.”
Johnson states as much in his own recent tweet, writing, “There are few better examples of the burgeoning inequality in our city than $238 million-dollar homes that will most likely sit empty.”
The bill is currently in the Senate Cities Committee. In addition to Hoylman, it’s sponsored by Sens. Timothy Kennedy, Liz Krueger and Julia Salazar.
More Than Just Tax Money
Tax losses aside, pied-a-terre buyers can also indirectly influence the communities they buy in, according to Constantine Valhouli, director of research at real estate analytics firm NeighborhoodX.
“From a developer’s or seller’s perspective, removing regulations on who can purchase and eliminating higher transaction costs can result in more demand and thus higher prices,” he said. “However, as we have seen, the unintended consequences of this drive up housing costs for those who wish to be residents, rather than investors, and can deaden the character of entire neighborhoods.”
Valhouli said it’s not uncommon for large swaths of these buyers to impact local businesses, culture and overall affordability.
“Because many of these expensive properties are effective ways for foreign buyers to park capital in a stable region, they are often viewed as fancy safe-deposit boxes rather than as residences,” he said. “But this turns densely-populated areas into something else entirely—and the economics of these neighborhoods can change.”
The pied-a-terre tax could certainly push high-wealth buyers into other markets. Swanson said it might even sever as an “exit tax” to incentivize moving out of state.
As NYC-based Warburg Realty broker Wendy Arriz explains, “An additional tax in a high/overtaxed state like New York dissuades buyers. Many pied-a-terre buyers feel like they do not use the services of the building or the city, for that matter, as much as full-time resident owners. Why should they have to pay more for something they use less of?”
It could hurt sellers, too, with buyers asking for additional contributions or negotiating more. Broker Bonnie Lindebaum, Arriz’s colleague at Warburg, already has one seller ready to reduce her home’s listing price if the tax is enacted.
“I have a seller who was vacillating on the price, but if the tax is implemented, she will definitely reduce it and cut her losses,” Lindebaum said.
Improving the Bill
Regardless of where they stand on the tax, most in New York’s real estate industry agree: there are some kinks to work out before the bill can go into effect.
First, there’s the question of what a pied-a-terre actually is. And according to NYC-based real estate attorney Petro Zinkovetsky, policing that definition—whatever it may be—could prove difficult.
“Who will determine that an apartment is a pied-a-terre? It’s not a type of an apartment like a condo or a coop; it just means that the owner does not live there full-time,” Zinkovetsky said. “What if the owner’s relatives or children live in the apartment without a lease or the owner is trying to rent the unit but can’t find a tenant for a long time? Is the city going to go door to door to check if someone lives in the apartment?”
According to Swanson, the final bill will need to include exemptions for some of these outlying buyers.
“What gets caught in the cracks?” he asked. “What about people who are between properties and briefly own an apartment in New York City valued at more than the taxable threshold that they are trying to sell? Should they pay the tax, too? I suspect that any final legislation would include some kind of exemption or grace period for people trying to sell their apartment. “
As Valhouli puts it, “not all pied-a-terres are equal,” and determining exactly what should be taxed and what shouldn’t will be key in drafting any potential law.
- Originally posted on Forbes