By all appearances, a pied-a-terre tax on second homes is out, and a real estate transfer tax on high-value sales is in.
In the midst of state budget negotiations, Gov. Andrew Cuomo indicated in a radio interview on Tuesday that lawmakers were moving away from pied-a-terre in favor of a transfer tax on the purchase of real estate valued at over $5 million, a measure aimed at helping to fund the Metropolitan Transportation Authority. In the Assembly’s budget resolution, the tax is proposed statewide for any high-dollar real estate sales, rather than for just New York City. However, state lawmakers said recently a transfer tax would apply to the same targets as the pied-a-terre tax: condos and co-ops.
Assembly Speaker Carl Heastie appeared to confirm the shift when he told reporters that the pied-a-terre had hit roadblocks, including difficulty implementing it without a larger reform to property tax assessments in New York City and concerns from business and real estate leaders who claimed the tax could damage an already weakening luxury real estate market in New York City.
What is a transfer tax?
A transfer tax is a one-time fee imposed on the transfer of property, usually paid by the seller. Both New York City and New York state already have one. Statewide, the tax is imposed on any property transfer over $500 at a flat rate of $2 for every $500, or 0.4 percent. In New York City, the tax is imposed on any transfer of residential property valued at $25,000 or more at a rate of 1 percent. However, unlike at the state level, the city imposes a higher rate, 1.425 percent, on residential real estate valued at more than $500,000. For all other real estate, such as commercial properties, the rates are higher, taxing the sales values of under $500,000 at 1.825 percent, and higher than $500,000 at 3.025 percent. Additionally, the city has also imposed what it calls a 1 percent mansion tax on sales valued at over $1 million, typically paid by the buyer.
So what’s different about this new one?
Details about the proposed new transfer tax remain scarce, but lawmakers have said it will apply to the sale of real estate that is valued at $5 million or more on top of the existing transfer tax. The Wall Street Journal reported that lawmakers are also looking into applying the new tax to sales of $3 million or more, with a rate increase at $5 million. While the specifics are still under negotiation, the Assembly budget resolution proposes a tax rate of .3 percent for properties between $5 million and $10 million, with incremental increases that top out at 1.5 percent for sales of over $1 billion or more. Heastie said that it would raise between $300 million and $400 a year. This estimate is well below the $650 in annual revenue New York City Comptroller Scott Stringer predicted a pied-a-terre tax would bring in.
Why the change?
According to Heastie, the annual pied-a-terre would be too difficult to administer, with the transfer tax offering a much easier alternative. A pierre-de-terre tax has never been implemented in the United States, so there is no national precedent to follow and would presumably further complicate the city’s already opaque property tax system. It would also require the city to put in place an entirely new assessment system to determine market rate values. Members of the real estate and business community, as well as fiscal watchdogs, have warned that the pied-a-terre tax could deter potential buyers from investing in New York City real estate, thus costing New York City revenue from property taxes and harming the market. Andrew Rein, president of the Citizens Budget Commission, said a transfer tax would have less of a negative impact than the pied-a-terre on city’s luxury housing market. “The transfer tax, certainly, given all the considerations of whether you should increase taxes, it would be preferable to a pied-a-terre tax in general,” Rein said.
Does the transfer tax accomplish the same goals as the pied-a-terre tax?
No, the transfer tax would not serve the same non-revenue purposes of taxing second homes. These include discouraging non-residents from buying second homes, thus leaving apartments available for city residents, encouraging owners to list the property as their primary residence to avoid the pied-a-terre tax, but enabling their income to get taxed in New York, and perhaps incentivizing certain owners who never use the property to rent it to full-time residents to defray the tax’s cost.
It was also supposed to force rich investor-buyers – who benefit from the city’s vitality and its public infrastructure as a boon to their wealth, without contributing much in taxes if their building was built with an abatement – to help pay for the city’s needs. Instead, the real estate transfer tax will fall mostly on actual residents who already pay income, sales and property taxes.
Moreover, for proponents of a pied-a-terre tax, reducing the rampant price inflation in the city’s housing market and potentially scaring off super-rich buyers was part of the point.
E.J. McMahon, policy director at the right-leaning think tank Empire Center, argues that the real estate transfer tax may still have that last effect – a benefit to affordable housing advocates and a drawback to conservatives and real estate interests. Any new tax that targets luxury housing could have a deflationary effect on that market, especially with the effects of the new Republican federal tax law’s cap on state and local tax deductions. “Neither one of them is as slam-dunk as (lawmakers) are portraying,” McMahon said.
McMahon also said that while pied-a-terre poses certain problems, a transfer tax would have others. Since the tax is not annual and its revenue projections are based on a healthy real estate market, it is highly volatile. So it is a poor candidate for dedicated tax bonds, a key way the state uses the revenue from taxes to invest in infrastructure improvements.
Ron Deutsch, executive director of the left-leaning fiscal policy institute, disagreed with naysayers, saying that anyone who has the money to buy luxury apartments and condos likely won’t be deterred by the prospect of a relatively small new tax. “When you’re at that income level, I really don’t think you’re too worried about the taxes that you’re going to pay on a $238 million property,” Deutsch said, referencing the property recently bought by Kenneth Griffin that reignited debate about pieds-a-terre. He also does not believe the volatility of a transfer tax would have much of an effect an annual revenue. Deutsch added, though, that while he thinks both taxes should pass, if the state only does one, pied-a-terre would be better as it explicitly targets non-residents who are not contributing to the local economy as much as residents are.
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