Best of Times
You landed a hard-to-come-by position at a prestigious Manhattan-based company. The hours spent at the office, including most weekends and many holidays, were outrageous by any reasonable person’s measure. Your combined federal, New York State and City income tax burden[i] was hefty, and the cost of living in the City[ii] was daunting. The work was both challenging and demanding. It was also exhilarating, and there were opportunities for advancement, the annual compensation was good, and the year-end bonuses were generous.
After a few years and some significant life events, you gave up the convenience of living in Manhattan and moved to an affluent community in New Jersey, which entailed a nearly two-hour commute each way.
It’s true that New Jersey consistently ranks among the five states with the highest income tax rates in the country[iii] and, yes, you continued to file personal income tax returns with New York State, but as a nonresident, meaning you paid New York tax only on your New York source income. Unfortunately, that included your only significant source of income, which was the same as before – i.e., the earnings from work performed in New York, all of which was allocated to New York.[iv]
There was a silver lining, however: because you were not a resident of New York City, it could not tax your income even though such income was sourced in the City.
That fact was probably of small comfort because the county in which you chose to reside in New Jersey has consistently placed in the top fifteen nationally for real property taxes.
Still, you believed that the economic and other, intangible, benefits were worth the effort and the cost.
Time Passes
Eventually, the daily commute to and from the City started to take a toll on you, as did the continuing long hours spent at work, notwithstanding your having moved up in the company’s hierarchy. You tried to work from home occasionally, which spared you the travel time but, thanks to New York’s convenience rule, did nothing in the way of reducing your New York income tax liability.
Years passed, the kids were finishing their studies and about to enter the workforce, the satisfaction of the mortgage on your house no longer felt like some remote event, and you managed to save some money in a tax-deferred retirement account.
Although, by most standards, you were doing well financially, you hadn’t acquired investment assets that generated a regular, let alone significant, revenue stream.
Instead, like most people, you remained dependent on the cashflow generated by your services to cover your expenses; this cashflow would continue so long as you kept working.
Still, it was time for a change, and you had recently received an inheritance which, although far from life-changing, gave you the wherewithal to pursue an option you had long been considering.
In order to reduce the time you spent commuting, and to provide yourself a “base” from which to start enjoying all that the City offered[v] – beyond the meals delivered to your office once or twice a day over many years – you decided to acquire a small apartment in Manhattan.[vi]
In January of Year One,[vii] you financed the acquisition of a studio condominium unit for the “reasonable” sum of approximately $600,000 (about the median price at the time), though the amount of the monthly common charges – which are now at approximately $2,000 per month – nearly equaled the monthly payment on your loan. There were times, subsequently, that you regretted the decision, but would remind yourself that a City residence represented a smart, long-term investment.[viii]
Worst of Times
Shortly after filing your nonresident personal income tax return with New York State for Year One, you received a notice informing you that, because you maintained a “permanent place of abode” in the City[ix] for “substantially all” of Year One, and because you spent more than 183 days in the City during that year – you worked in Manhattan – you were treated as a statutory resident of the City for that year and, therefore, were subject to New York State and City personal income taxes on all of your Year One taxable income regardless of its nature or source.
Because you planned to continue working and maintaining an apartment in Manhattan for the foreseeable future, you resigned yourself to being treated as a resident of New York State and City, and to paying taxes to those jurisdictions on all your income for several years to come.
The DSA in City Hall
A few more years passed. You survived a couple of incompetent mayoral administrations. Shortly after the election of the current mayor, you heard that he wanted to impose a new surcharge (basically, a property tax) on co-op and condominium apartments worth more than $5 million, that were owned by nonresidents – dubbed a “pieds-a-terre tax.” Proponents of the tax claimed that the wealthy, absentee owners of such apartments enjoyed many of the services and protections provided by the City but, as nonresidents, did not contribute toward the cost thereof.
Subsequently, you learned that the tax had been enacted,[x] and that the City would be notifying those individuals that it had preliminarily determined may be subject to the new tax.
Until recently, you weren’t overly concerned about the new tax because your apartment was not worth anywhere near $5 million, though it is located in what may be described as a “hot” neighborhood, so you are certain it is worth substantially more than what you paid for it.
What’s more, even though you are domiciled in New Jersey, you’re taxed as a resident of New York City, reporting and paying income tax on all your income, regardless of its source. You figure that you cannot be one of the taxpayers at which the new tax is aimed – i.e., the non-tax paying wealthy absentee owner.
The Notice
Then, in late July 2026, you received a notice from the City’s Dept. of Finance (the “DOF”) informing you that, for the 2026-to-2027 fiscal year, you may be subject to the new pied-à-terre tax being imposed on certain residential properties[xi] in the City that do not serve as the “primary residence” of the owners of such properties.
The notice indicated that your apartment’s “assessed market value” – not its fair market value – as of January 5, 2026,[xii] on the basis of which the tax will be calculated, was $1.25 million.
You did some research and discovered that, on August 1, the City extended to Sept. 18, 2026 the application deadline for owners of a “covered property”[xiii] to establish that such property is their “primary” residence or to otherwise demonstrate they are not subject to the new tax.[xiv]
Primary Residence
Primary residence? The law provides that the DOF will make an initial determination annually regarding the status of a condo or co-op dwelling unit as the owner’s primary residence. Among the factors the DOF will consider are the whether the dwelling unit was identified on individual income tax returns or other documents filed with the City as the owner’s permanent home, and whether the individual owner occupied the property for a majority of days during the immediately prior calendar year.
You view your New Jersey home as your permanent home and identify it as such on all your tax filings and other “official” documents.[xv] You are domiciled in New Jersey; that is where your primary residence is located.
The Manhattan apartment serves as a convenient place to stay during a hard-paced work week, and as a base for “nights on the town” and for exploring the City.
In other words, it is the kind of property to which the new tax would apply, provided the value of the property exceeded the prescribed dollar threshold.
Phase One
After some additional research,[xvi] you realize that the tax is being implemented in two phases; during the first phase, the $5 million threshold you had heard so much about only applied to residential real property with not more than three dwelling units.[xvii]
For fiscal years beginning on or after July 1, 2026 and before July 1, 2028 – “phase one” – the tax will be imposed on a “residential condominium dwelling unit” or a “residential cooperative dwelling unit” with a “phase one market value” equal to or greater than $1 million.
Based on your apartment’s “phase one market value”[xviii] shown on the notice – about $1.25 million – and applying a rate of 4 percent to the full amount thereof, the pied-a-terre tax to be imposed on the apartment for the 2026-to-2027 fiscal year is approximately $50,000; i.e., an additional cost of more than $4,100 per month, as compared to your common charge of about $2,000 per month.[xix]
You also note that the same rate and threshold value will be applied to the assessed market value of the apartment for the 2027-to-2028 fiscal year (still phase one). Then, beginning with the 2028-to-2029 fiscal year (the start of “phase two”), the threshold value[xx] for the imposition of the tax is scheduled to increase to $5 million for all covered properties (which includes condominium dwelling units), and will remain in effect until the tax sunsets after the 2030-to-2031 fiscal year.[xxi]
Although the prospect of one more year of the additional tax based on the current $1 million threshold is odious, it is just one payment, and you’ll bear it if you must.[xxii]
What to Do?
Notwithstanding the scheduled increase in the threshold value beginning in phase two, and notwithstanding the scheduled sunset of the tax after June 30, 2031, you are concerned that, after the tax and its enforcement mechanisms have been successfully implemented and actually tested, the $5 million threshold will be lowered to capture more taxpayers, and that the tax will eventually be made permanent.
With these concerns in mind, you contact Adviser (a tax professional) for some guidance. Among the items you considered with Adviser, including potential options, were the following:
- i. Should property owned by a NYC Statutory Resident who is domiciled in New Jersey be subject to the tax?
- a. Considering the reasons given for the enactment of the tax, its imposition on a property owned by a statutory resident seems unwarranted.
- b. Still, a literal reading of the Tax Law, the Administrative Code, the Regulations and Rules promulgated under those statutes, respectively, supports imposition of the tax under those circumstances.
- c. The Adviser concludes the tax applies, but also states that he’ll be monitoring any pronouncements from the DOF that may clarify the issue
- ii. Is there any way to treat the Manhattan apartment as a primary residence?
- a. A covered property[xxiii] or a residential cooperative dwelling unit, is a primary residence if it is used[xxiv] as such by:
- i. a covered owner[xxv] who is a natural person,
- ii. an immediate family member of a covered owner,[xxvi]
- iii. a lessee who is a natural person occupying such covered property or residential cooperative dwelling unit pursuant to a bona fide lease agreement that was negotiated in an arms-length transaction with a term of not less than one year.
- 1. an arms-length transaction is one that was entered into in good faith and for valuable consideration that reflects the fair market rental value of the covered property or dwelling unit between two informed and willing parties, where neither is under any compulsion to participate in the transaction, and circumstances do not indicate a reasonable possibility that the lease was entered into primarily for the purpose of avoiding imposition of the surcharge.
- b. Based on the foregoing, perhaps you should suggest to one of your kids (who will be working in the City) that they might consider living in the apartment? Assuming one of them is amenable to doing so, and is able to establish it as their primary residence, the tax would not apply. You might even consider charging them some below-market rent to help with the costs of maintenance.
- i. Easier said than done. It’s a studio. Where would you stay when you decide to use it? Would your ability to use it jeopardize its treatment as the primary resident of a family member? What’s more, would either of your kids want you as a roommate?
- ii. Would the arrangement be more defensible if you charged fair market rent? What if such rent was beyond the kid’s financial wherewithal? What if they missed a payment every now and then? Could you reasonably expect to defend against a claim that the lease was entered into primarily for the purpose of avoiding imposition of the tax?
- iii. What if you transferred the apartment into an LLC, another business entity, or a trust?[xxvii]
- a. Unfortunately, such a transfer would accomplish little under the scenario described.
- b. Under different circumstances, there may be bona fide investment-related reasons for using one of these entities to hold title to the apartment; for example, where the property is to be leased in an arm’s length transaction. That is not the case described herein. And while there may be legitimate estate planning reasons for transferring the property into one of these entities, doing so will not remove the property from the reach of the tax.
- c. Indeed, if you were trying to take advantage of the exception from the tax for primary residences, using an entity could make it more difficult to qualify.
- i. For example, if a family LLC owned the apartment, the primary residence exception would only be available to a member who held a majority interest in the LLC.[xxviii]
Parting Thought
The “regular guy” described above is not a titan of industry or master of the universe or whatever else such folks are called or call themselves. He’s a hard-working individual who has done well by earning his success. He was fortunate enough to receive a windfall that enabled him to acquire the apartment. He’s not the kind of condo owner in front of whose building the mayor is going to film a video touting the “justice” meted out by the pied-a-terre tax.
Yet, here he is, subject to the tax during phase one of its implementation, and not unreasonably concerned that the threshold value for application of the tax may, in the not-too-distant future, be reduced.
There’s something wrong with this picture. Stay tuned.
[i] A combined effective rate that ranked in the top three nationally.
[ii] About double the national average.
[iii] 10.75% on taxable income over $1 million.
[iv] As a resident of New Jersey, you were permitted to a claim a credit against the New Jersey income tax imposed on the same New York source income.
[v] Of course, this all happened pre-Mamdani.
[vi] “YOLO,” they say, right?
[vii] I was channeling 2012; can’t say why – just was.
[viii] Query whether this will change during the current mayoral administration.
[ix] Before 1999, Form IT-203 asked whether the nonresident or part-year resident taxpayer or their spouse maintained “living quarters” in New York City. After 1998, the form asks only about a New York State residence.
That being said, Form IT-203-B (Nonresident and Part-Year Resident Income Allocation) asks the taxpayer to provide the number of days spent in New York (including the number of working days) during the year for which it is being filed. The form also asks for the address of the New York living quarters maintained by the taxpayer or their spouse.
[x] The tax was signed into law by the Governor (don’t get me started) on May 28, with an effective date of July 1, 2026 and an expiration date of June 30, 2031, unless renewed earlier by Albany.
N.Y. Tax Law, §§ 1350 et seq.; N.Y.C. Admin. Code tit. 11, ch. 32, §§ 11-3201 et seq.; 19 R.C.N.Y. ch. 62.
It is often the case that a “temporary” New York tax does not expire; instead, it is “temporarily extended” several times.
[xi] One-to-three-family homes, condominiums, and co-ops when owners have a separate primary residence.
[xii] This is the “taxable status date” – the January fifth immediately preceding the fiscal year in which the surcharge is imposed. NYS Tax Law Sec. 1351(q).
[xiii] NYS Tax Law Sec. 1350. The tax is imposed on a so-called “covered property.” This includes one, two and three family residential real property, including such dwellings used in part for nonresidential purposes but which are used primarily for residential purposes or, in the case of a covered property that is a residential cooperative property, a residential cooperative dwelling unit, that is not a primary residence, provided that:
(a) for fiscal years beginning on or after July 1, 2026 and before July 1, 2028 – Phase One – first, two thousand twenty-eight, the phase one market value of such covered property that is a class one property is equal to or greater than five million dollars, the phase one market value of such covered property that is a residential condominium dwelling unit is equal to or greater than one million dollars, or, in the case of a covered property that is a residential cooperative property, the phase one market value of a residential cooperative dwelling unit within such residential cooperative property is equal to or greater than one million dollars; and
(b) for fiscal years beginning on or after July first, two thousand twenty-eight and ending June 30, 2031, the phase two market value of such covered property or, in the case of a covered property that is a residential cooperative property, such residential cooperative dwelling unit, is equal to or greater than five million dollars.
[xiv] https://www.nyc.gov/mayors-office/news/2026/08/mayor-mamdani-and-commissioner-lee-extend-deadline-for-pied-a-te. Homeowners were originally given until the week beginning August 24 to submit applications for exemption from the tax. https://www.nyc.gov/site/finance/property/non-primary-residence-surcharge.page.
[xv] For example, federal and state income tax returns.
[xvi] DOF has launched a dedicated webpage (nyc.gov/npsurcharge) that features frequently asked questions, an eligibility tool, detailed guidance, and instructions for submitting documentation.
[xvii] Class One properties. NYS Tax Law Sec. 1351 refers to Sec. 1802 of the Real Property Tax Law.
[xviii] NYS Tax Law Sec. 1351(k).
[xix] https://www.nyc.gov/site/finance/property/non-primary-residence-surcharge.page.
[xx] “Phase two market value” within the meaning of NYS Tax Law Sec. 1351(l).
[xxi] Ending June 30, 2031.
[xxii] It’s highly doubtful that the apartment will appreciate so much within such a shirt period so as to be subject to the tax during phase two.
[xxiii] “Covered property” generally means real property classified as: (1) class one property, other than vacant land; (2) class two property that is a residential cooperative property in which at least one residential cooperative dwelling unit: (A) has a phase one market value equal to or greater than one million dollars or phase two market value equal to or greater than five million dollars; and (B) is not a primary residence; and (3) class two property that is a residential condominium dwelling unit.
[xxiv] As of the taxable status date immediately preceding the fiscal year in which the tax is imposed.
[xxv] “Owner” means: (1) an owner or owners of real property classified as class one property; (2) a tenant-stockholder of a cooperative corporation whose interest in a portion of real property held by such corporation is represented by shares of stock in such corporation, or such corporation; or (3) an owner or owners of a residential condominium dwelling unit.
A “covered owner” means (1) an owner or owners of real property classified as class one property; (2) a tenant-stockholder of a cooperative corporation whose interest in a portion of real property held by such corporation is represented by shares of stock in such corporation; (3) an owner or owners of a residential condominium dwelling unit; (4) where real property classified as class one or a residential condominium dwelling unit is held, or shares of stock in a cooperative corporation are held, in trust, a beneficial owner or owners of such trust, provided that such beneficial owner or owners are the sole beneficiaries of such trust; or (5) where real property classified as class one or a residential condominium dwelling unit is held, or shares of stock in a cooperative corporation are held, by a partnership, corporation or limited liability company, a partner or partners, shareholder or shareholders or member or members of such partnership, corporation, or limited liability company, respectively, provided that such partner or partners, shareholder or shareholders, or member or members hold a majority interest in such partnership, corporation or limited liability company respectively.
[xxvi] The phrase “immediate family member” means a spouse, child, sibling, parent, grandparent, or grandchild of the covered owner.
[xxvii] 19 RCNY Sec. 62-02.
[xxviii] 19 RCNY Sec. 62-01. In the case of an LLC, the term “majority interest” means entitlement to more than 50% of the capital or profits of such LLC.