Real Estate

New York, back in sweaters

Homeownership is relatively rare and peculiar in New York City. In a nation consisting primarily of homeowners, the city sets itself apart: More than two-thirds of its homes are made up of those who rent, rather than own, their homes.

The differences are not limited to property rates, either. Like the rest of the United States, New York has its single-family houses and its townhouses. It also has condominiums, in which individuals own their apartments while the common areas are shared. But, to a degree unheard of 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 cooperative, 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 complies with the co-rules. of the operation.

In many parts of the United States, the rules that New Yorkers accept as part of big city life would be considered almost unbearably intrusive. You cannot buy or sell a cooperative apartment without the approval of the cooperative’s board of directors, which often withholds that approval and is not required to give any reason for doing so. During the housing crisis, 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 did not want to acknowledge that the value of their own homes had declined. When a cooperative approves a sale, it also usually takes away part of the profits through a “variable tax” that it imposes on the transaction.

Many cooperative boards limit the amount of financing a buyer can use. Some, especially in the more expensive buildings in Manhattan, only allow cash transactions. Some cooperatives appreciate the prestige that famous buyers can bring; others loathe paparazzi and onlookers they might attract.

You might think that the city would take a break from cooperative owners, considering all the hassles that this peculiar New York institution entails. But you would be wrong. In reality, the structure of the New York State property tax system penalizes cooperative 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, second home, or some other type of real estate. New York is – by the state’s own description – Byzantine, fragmented and inefficient, as well as one of the most expensive in America. (1))

For the past 15 years, the state has offered relief to co-op and condo owners, both in the city and in its suburbs, where most of the rest of New York’s multi-family housing is concentrated. This relief came in the form of a tax cut 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 unit owners. Most cooperatives pocketed the money from the reduction, but since the reduction helped defray the costs of maintaining the buildings, the unit owners still benefited.

Now, however, the state has tightened the reduction eligibility rules in a way that is likely to mislead many reckless homeowners into paying state and municipal 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 by doling out favors to well-connected interest groups, these by-products of abatement reform are probably no coincidence.

As The New York Times reported, the Governor. Andrew Cuomo signed legislation earlier this year that will restrict co-op and condo reductions to homeowners who declare the units their primary residence. (2) If you own a cooperative apartment in, say, Manhattan as a second home, you will pay a higher tax rate than if you owned a private home of equal value in Riverdale or Jamaica Estates. Those detached homes do not need to be primary residences to qualify for your favored tax treatment.

Owning a cooperative or condominium through a trust or limited liability company also does not qualify, although the city can make concessions for trusts whose beneficiaries can demonstrate that they use the home as their primary residence.

Many second home owners will likely find 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 terminated 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 declare your apartment as your primary residence, New York State and New York City will consider you a resident, and you will pay income taxes to both on all your income. If you still spend most of your nights in Connecticut, that state will treat you as a resident as well. At most, each state will give you a credit for the taxes you pay on wages earned in the other, but all income from your investments will be taxed by both states and the city.

It gets worse. Suppose you move to Florida, selling the Connecticut home but keeping the New York apartment. 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 your home address, the Empire State will continue to treat you as a resident even if you are only there for a few days a year. The state’s tax dispute resolution system is heavily skewed 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 name will ensure that your estate must go through the New York probate process. Your will becomes part of the public record. Many homeowners put their properties in trust or with limited liability companies to avoid the cost and public exposure of probate. The new property tax reduction rules will lure some unsuspecting homeowners into the New York probate system. Additionally, owning real estate directly will attract some out-of-state homeowners to the New York estate tax system as well.

Should I apply for the reduction under the new rules? Sure, if you are a die-hard New Yorker who could never imagine living anywhere else. In that case, take what the law gives you.

All others: watch out. You may not want to look at a gift horse in the mouth, but if the horse is made of wood and someone leaves it outside your castle gate, think 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 Reply

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

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1