New York Pulls You Back In

Home ownership is a relatively rare and peculiar thing in New York City. In a nation that consists mostly of homeowners, the city stands apart: More than two-thirds of its households are composed of those who rent, rather than own, their dwellings.

The differences are not limited to ownership rates, either. Like the rest of America, New York has its single-family homes and its row houses. It also has condominiums, in which individuals own their apartments while common areas are shared. But, to a degree unheard of in the rest of the country, New York’s housing stock also includes cooperatives.

Co-op buyers technically own no real estate at all. A co-op, which is almost always an apartment, consists of shares in a corporation that owns the apartment building, combined with a “proprietary lease” that allows the owner to occupy an apartment indefinitely as long as the owner complies with the co-op’s rules.

In many parts of America, rules that New Yorkers accept as a part of life in the big city would be seen as almost unbearably intrusive. You cannot buy or sell a co-op apartment without approval from the cooperative’s board of directors – who often withhold that approval, and who are not required to give any reason for doing so. During the housing downturn, some co-ops had an informal policy of blocking sales because they thought the 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 decreased. When a co-op approves a sale, it also often skims off some of the proceeds via a “flip tax” it imposes on the transaction.

Many co-op boards limit the amount of financing a buyer can use. Some, especially in Manhattan’s pricier buildings, permit only cash transactions. Some co-ops welcome the cachet that celebrity buyers can bring; others loathe the paparazzi and gawkers they might attract.

You might think the city would cut co-op owners a break, considering all the hassles that come with this peculiar New York institution. But you would be wrong. Actually, the structure of the New York state property tax system penalizes owners of co-ops and condominiums. Their property is taxed at a substantially higher fraction of its fair market value than are individual homes. (In most states, tax rates are based directly on fair market value, with potential differences in rates according to whether property is a primary residence, a second home, or some other type of real estate. New York’s system is – by the state’s own description – Byzantine, fragmented and inefficient, as well as one of the most expensive in America.)

For the past 15 years, the state has offered relief to co-op and condo owners, in the city as well as 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 abatement that directly reduced the tax bills for most condominium owners. Co-op owners could only benefit indirectly, because co-op property taxes are paid by the co-op corporation, rather than by unit owners. Most co-ops pocketed the abatement money, but since the abatement helped defray the buildings’ maintenance costs, the unit owners still benefited.

Now, however, the state has tightened the abatement eligibility rules in a way that will probably trick many ill-advised owners into paying state and city income taxes that will cost far more than the abatement is worth.

On the other hand, the new rules will likely mean more business for New York’s probate lawyers. Given the way New York’s Legislature operates – aggressively seeking maximum revenue while doling out favors to well-connected interest groups – these byproducts of the abatement reform are probably not mere coincidence.

As The New York Times reported this weekend, Gov. Andrew Cuomo signed legislation earlier this year that will restrict the co-op and condo abatements to owners who declare the units as their primary residence. If you own a co-op 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 stand-alone homes need not be primary residences to qualify for their favored tax treatment.

Owning a co-op or condo through a trust or a limited liability company won’t qualify, either, though the city may make allowances for trusts whose beneficiaries can show that they use the home as a principal residence.

A lot of second-home owners are likely to figure that filling out a form or making a telephone 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 come to regret.

The property tax break can be changed or ended at any time. Under New York’s draconian income tax policies, however, membership in New York’s highly taxed club of “residents” is very difficult to resign. You may try to get out, but they pull you back in.

Suppose you have a home in Connecticut and an apartment in Manhattan. If you declare your apartment as your primary residence, New York state and New York City will deem 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 also treat you as a resident. At most, each state will give you credit for taxes you pay on wages earned in the other, but all your investment income will be taxed by both states, and by the city.

It gets worse. Suppose you move to Florida, selling the Connecticut house but keeping the New York apartment. Maybe you spend most of your time working from your new Florida home and only come to Manhattan occasionally for meetings or to visit friends. Having already declared New York to be your domicile, the Empire State will continue to treat you as a resident even if you are there just a handful of days each year. The state’s system of adjudicating tax disputes is heavily skewed in the tax collector’s favor. The only reliable way to get rid of that New York domicile will be to get rid of the New York dwelling.

Owning a condominium in your own name will ensure that your estate must go through New York’s probate process. Your will then becomes part of the public record. Many property owners put their holdings in trust or in limited liability companies to avoid the cost and public exposure of probate. The new property tax abatement rules will lure some unwary owners into the New York probate system. Moreover, owning real estate directly will suck some out-of-state owners into New York’s estate tax system, too.

Should you put in for the abatement under the new rules? Sure, if you are a dyed-in-the-wool New Yorker who could never envision living anywhere else. In that case, take what the law gives you.

Everyone else: beware. You may not want to look a gift horse in the mouth, but if the horse is made of wood and somebody leaves it outside your castle door, think very carefully before you bring it inside.

About Larry M. Elkin 552 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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