Pied-à-terre, Cash-Purchase Taxes Will Shift New York Market

Real estate people are scrambling to gauge the effects of the pied-à-terre and cash-buyers taxes.

One industry insider looked at my random example of 737 Park Avenue, a prestigious co-op. Unit 19A just hit the market for $18 million. Let’s assume it’s purchased for that amount and becomes a second home.

After the temporary version of the tax gives way to the new, sales-based method floated by Gov. Kathy Hochul, the surcharge would be nearly $200,000 a year, in addition to its regular $100,000 property tax, the source estimated.

“That owner has been undertaxed for a while and needs to pay more,” the insider texted me. “But I don’t think the market is going to react favorably to a 3X increase in taxes. Free up your capital and get a $25K-a-month rental.”

Taxing purchases will make renting more attractive. But how many wealthy outsiders will rent rather than own a pied-à-terre? How many will continue to own but avoid the tax, such as by “renting” the unit to a ghost tenant, like a niece or a house-sitter?

Would hiring someone to use your Billionaires’ Row condos as a mail drop save you from a six-figure pied-à-terre tax? What if your “tenant” becomes a squatter?

Ripple effects

The tax may affect development decisions and the luxury market. Will folks like Gary Barnett start building more rentals than condos? Will shifting demand push luxury rents up and sale prices down?

Other ripple effects are likely. The new tax will reduce the income of luxury agents and brokerages and generate business for real estate lawyers and tax specialists.

People who would have bought a pied-à-terre as an investment will not rent one instead. But will they forget apartments entirely and just stay in hotels when visiting?

Here’s a political question: Why are the Hochul and Mamdani administrations cracking down on people who own a pied-à-terre but not on people who rent one? Seems inconsistent.

“They want money,” my source surmised. And also to fulfill Mayor Zohran Mamdani’s campaign pledge to tax the rich.

“Taxing things at this level is usually meant to discourage their use, but in this case they want more [pieds-à-terre] because it’s a revenue stream,” the insider said. “Sort of counterintuitive.”

The same motives explain the state’s out-of-the-blue proposal to add a 1 percent transfer tax on all-cash, $1 million-or-more home purchases. Buying in cash avoids the mortgage recording tax; the new tax would make them pay anyway, but unlike the MRT would provide no value.

Recording a mortgage does provide value — legal protection in case the borrower defaults. That is what I was told when I bought a condo unit in 1993 with a mortgage from my parents.

To duck the tax, my folks did not record the mortgage, trusting that I’d repay the loan, which I did as soon as possible. It was an early lesson in tax avoidance.

Bad planning

This year’s state budget process has been a fiasco for real estate as well as from a good-government standpoint.

It continued a pattern in which lawmakers look to real estate every time they want revenue for something — the transit system, pre-kindergarten, day care and now to balance a city budget that’s in deficit for no obvious reason.

Lawmakers dropped these two new taxes out of the sky well after budget hearings ended and weeks after the budget’s April 1 due date.

I assume cash buyers will find ways to avoid the tax aimed at them. If a sale is split into multiple payments, only one of which is recorded, will the government find out about the others?

Hearings would also have surfaced the numerous obstacles to creating a fair, effective and constitutional pied-à-terre tax. Instead, the governor and mayor simply announced it, then worked backward to make it functional. It’s not clear that they did.