New York State lawmakers have made a few attempts over the years to institute a one-time fee on the purchase of luxury-priced non-primary residences, but the so-called pied-à-terre tax has not come to fruition.
Now, with New York facing a huge tax revenue shortfall due to the pandemic, and the bill’s sponsors working out an issue related to how co-ops would handle the new surcharge, coupled with more New Yorkers fleeing the city for more spacious homes in the suburbs, the country and further south to lower-tax Florida, the luxury tax appears to be back on the table.
Unsurprisingly, the city’s real estate agents are not optimistic, and believe the new surcharge could go against the law’s intent, further dampening an already-struggling real estate market.
According to the proposal, originally introduced by Senator Brad Hoylman, the fee would range from .5% to 4% of the excess market value above $5 million for one- to three-family non-primary residences and 10% to 13.5% of the assessed value above $300,000 for condos and co-ops.
Cody Vichinsky of Bespoke Real Estate, a firm that focuses only on properties listed at $10 million and above in Manhattan — as well as the Hamptons, Connecticut and Florida, where the markets are surging, due in part to wealthy New Yorkers leaving the city — believes the tax will have the opposite effect.
“It’s been reported that if the pied-à-terre tax passed through Senate, it would cut properties priced in the $25 million plus range by 46%,” Vichinsky says. “This would act negatively towards everything that the bill is trying to accomplish, or says that it will accomplish. The entire market would suffer as a result and the real estate investment potential would weaken in New York.”
The tax would give high-net-worth buyers one less reason to pull the trigger on a sale that could provide the state with much-needed revenue, Vichinsky argues.
“Most agents and brokers are facing a learning curve when it comes to the way they have priced properties, especially at the high end, and deals will continue to be made, but it’s just a matter of timing,” Vichinsky says. “Overall, sentiment is what drives secondary purchases and another hefty tax increase could lead buyers to look elsewhere. Wealthy buyers would not necessarily be pushed out of the city due to the caliber of clientele, but the city would lose some of its investment potential. The already competitive market would be negatively impacted and homeowners would be less likely to make a final decision until the time is right. You’re dealing with a group that has the ability to wait because they have the funds and time to do so – really no one is winning and it will only create a standoff.”
Additionally, many people have decided to leave New York City for the suburbs or the country, since they can now work remotely.
“With all of the uncertainty we are all facing, it is difficult for most people to go ahead and make what is likely to be one of the biggest purchases they will ever make,” says Sheila Trichter, a broker with Warburg Realty.
Warburg Realty broker Gerard Splendore takes a contrary view, and thinks the tax will help the state raise needed revenue.
“Owners and users of pieds-à-terre are not full-time residents of the city, so are not spending money at services and businesses in the city on a regular basis,” Splendore says. “This tax helps the city in the owners’ absence, while they are supporting businesses at their ‘full time’ residences. The income from the tax would definitely help to bail out the MTA, which is currently struggling.”
Splendore doesn’t think the effect on the real estate market would be substantial and could also help the hotel industry, which is also suffering considerably due to the pandemic.
“Pieds-à-terre would be smaller and priced below $300,000,” Splendore says. “As smaller pieds-à-terre are used in place of hotels, if there were fewer and smaller pieds-à-terre, the New York hospitality industry would profit.”
It’s also possible that if the law passes, it could spur purchases in advance of the proposed July 1, 2021 effective date, similar to how the mansion tax set off a closing frenzy before going into effect last summer.
Broker Rachel Lustbader of Warburg Realty believes, however, it’s a lot more complex this time around.
“It’s not easily compared to what happened with the mansion tax because of two reasons,” Lustbader says. “The mansion tax became an issue during a period of time that was relatively normal for the real estate market… and the buyers who would become subject to a higher tax than before — because most of the people were affected were $2 million and above, it had its greatest impact the higher you got in price point — were eager to buy, so you had a flurry of closings before it took effect. … By contrast to the situation I just described, the pied-à-terre buyers are usually in the higher price points and by definition, they don’t currently live in the city and I think there’s a larger question for them whether they want to be in the city at all. Particularly during COVID, we may be in a very different place in July 2021 COVID-wise, but because it’s all a question mark, this uncertainty still has an enormous impact. People don’t want to commit just on the assumption that we’ll have a vaccine and life will be back to normal. we don’t know how safe the city will be. We (also) don’t know if we’ll be at a point when the appeal of the city will be available: Broadway, movies, theater, department stores and boutiques. That will still be an unknown.”
Lustbader notes that unlike the mansion tax, this will be an annual tax.
“So the calculation of what that means in terms of the ultimate cost of the apartment is not a simple one,” Lustbader says. “How do you know how long you’ll live there?All of this is not a question of timing in terms of whether there will be a flood before July 2021, the question is whether it’s going to lead to purchases at all at any price.”
However, it’s also highly unlikely that wealthy individuals will abandon the city altogether. As Corcoran broker Andrea Pedicini noted when speaking about the influx of foreign investors he was seeing: “I don’t think this is the end of New York.”
Splendore thinks if the pied-à-terre tax is passed, there will definitely be a “fire sale” of expensive pieds-à-terre to avoid the future tax, similar to the market spike prior to the mansion tax being passed.
“A combination of factors play in to whether wealthy owners will want to maintain a ‘foothold’ in NYC, not the least of which is the imminent vaccine and the pending presidential election,” Splendore says. “If New York is not restored to 100% operating capacity, including Wall Street, fashion, retail, art, entertainment, business and education, pieds-à-terre taxed at a high rate will be less and less desirable.”