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BLOG / 06.16.26 /Kenneth R. Jacobs

Are you subject to the Pied-a-Terre tax?

Many Co-op and Condo owners are justifiably anxious about whether they will have to pay the new “Pied-a-Terre” tax (the “PAT Tax”) passed by New York State and effective July 1, 2026. Making that determination can be quite complicated.

Who Does the PAT Tax Apply To? The PAT Tax affects single-family homes, condominium units, and cooperative apartments in New York City that are not the “primary residence” of the owner, their tenant or subtenant, or one of their family members. If an apartment is the primary residence of the owner, lessee or sublessee (with a lease for at least a year), or a spouse, parent, child, sibling, grandparent or grandchild of such owner, lessee or sublessee, it is exempt from the PAT Tax. Otherwise it is a potential “covered property.” For purposes of this article, we will focus on the application of the PAT Tax to condominiums and cooperatives rather than single-family homes.

To determine primary residence, the City looks at days of actual occupancy and other information (voting records, tax return, driver’s license, etc.)  available to the City. If the unit is owned by a trust, the City considers the status of the beneficial owners of the trust. (Who is considered the beneficial owner is not defined.) Primary residence is reviewed annually.

Note:  The statute contains numerous nuances and exceptions to the primary residence rule (for example, a unit still owned by a Sponsor in a new condo development is also exempt from the tax), so it should be examined carefully.

If the unit has a “market value” of $1,000,000 or more and is not a primary residence, then it is potentially subject to the PAT Tax. A unit subject to the tax is called a “covered property.” If an apartment is a covered property, the tax ranges from 4% to 6.5% of the “market value” of the unit, as describe below.

What is the Threshold for Paying the Tax? The statute focuses on the “Phase One Market Value” of the Unit in the first two tax years beginning July 1, 2026, and “Phase Two Market Value” in tax years beginning July 1, 2028. We will look at each in turn.

IMPORTANT: “Market value” for Phase One PAT Tax purposes is not fair market value. It is also not assessed value. It is the City’s estimated market value for your unit shown on your property tax bill.

In the two tax years beginning July 1, 2026 and July 1, 2027, affected condo and co-op units with a “phase one market value” of $1,000,000 or more are potentially subject to PAT Tax. (For single-family homes the threshold is $5,000,000.)

Attached here is a sample tax bill for a condominium unit.  On page 2, the tax bill includes the “estimated market value” of the unit determined by the City.  In the sample tax bill, the market value of the Unit indeed exceeds $1,000,000, so we expect that the City will impose the PAT Tax surcharge on the owner if it is not a primary residence.

Unit owners need to check their “market value” individually. Unlike percentage of common interest, a unit on a lower floor will likely have a lower market value for real estate tax purposes than the identical unit on a higher floor, just like in real life.

Calculating the Phase one market value for Co-op apartments is much more complicated, since individual co-op apartments do not receive separate tax bills. The City sends out a tax bill for the whole building. Attached here is a sample tax bill for a Co-op building. That tax bill also includes an “estimated market value” for the building on page 2.

To calculate the fair market value of a co-op apartment, you need to divide the number of shares you own by the total number of shares in the cooperative corporation (the “share quotient”) and multiply the result by the estimated market value shown on the tax bill for the whole building. If the result is over $1,000,000, then you may be subject to payment of PAT Tax if it is not your primary residence.

In the sample tax bill, the building has a market value of $30,759,000.   If you have (say) 455 shares out of 17,500 total shares, you would multiply the market value by 2.6% [455/17,500] to get the estimated market value for your apartment ($799,734). Since that is less than $1,000,000, the apartment is exempt from the PAT Tax.

To find the total number of shares, you can check the cover page or Schedule A from the Offering Plan. Your managing agent should have that information.

The PAT Tax due on July 1, 2026 will be payable with the January 1, 2027 tax bill. The next payment will be due on July 1, 2027.

“Phase Two Market Value” begins on July 1, 2028. Beginning July 1, 2028, all covered properties with a “Phase Two Market Value” of $5,000,000 or more are subject to the tax if they are not a primary residence. The  “Phase Two Market Value” for an apartment  will be determined by the City, “using a method that considers sales of comparable residential condominium dwelling units [or cooperative apartments].” Unlike the market value calculations currently used by the City for property tax purposes, Phase Two Market Value will be calculated “without regard to potential caps on market value established within the different tax classes from which assessed value is derived.” In other words, for the first time the City will look at the sale prices of comparable apartments to calculate the “market value” of your unit. To be subject to the tax, that “market value” must exceed $5,000,000. This version of “market value” is likely to be higher than the market value shown on your tax bill.

Under current New York State tax law, different types of property have different “tax classes.” Within those tax classes, the state uses different formulas to calculate market values, assessed values (and increases in those values) for different size buildings. For example, currently the market value of multi-family apartment buildings is determined as if the whole building were a rental property. Each unit’s own market value should bear  a reasonable relationship to the total market value for the building. But that could be significantly different from the “fair market value” of individual apartments.

Beginning in 2028, it looks like the calculation of market value for individual apartments for PAT Tax purposes will be decoupled from the market value of the building shown on the tax bill.  Since the comparable sale prices of individual apartments usually far exceeds their share of the City’s “market value” calculation for the building, many more apartments might be subject to Pied-a-Terre Tax unless they qualify as primary residences.

PIED-A-TERRE TAX POSES MAJOR PROBLEMS FOR  LUXURY CO-OPS (PART II)

Co-ops Are Supposed to Collect the PAT Tax for the City. Under the new rules, the PAT Tax will be billed to the owner of the property as part of real estate taxes. It’s easy to bill houses and condo unit owners, but the collection procedures create some real problems for co-op corporations.

As written, the City will send the tax bill for the covered shareholders to the Co-op in conjunction with the Co-op’s real estate tax bill. The first tax bill is expected to be sent on January 1, 2027.

The Co-op is expected to bill the covered shareholder, collect the PAT Tax, and remit it to the City as part of its semiannual real estate tax payments.  That could work well as long as everyone pays the full amount on time. For some reason, we foresee potential problems:

1.  Limited Enforcement Rights. The Department of Finance is given the sole right to enforce the statute. The Co-op has to establish separate authority to collect within its Proprietary Lease. If the PAT Tax is not maintenance charges, user fees or special assessments, then what is it?

Recommendation: The Board could simply bill the PAT Tax as additional maintenance and see what happens. Alternatively, most Proprietary Leases require that the shareholder “comply with applicable law.” As you will see below, the failure of a shareholder to pay the PAT Tax when billed exposes the Co-op to financial hazard. Therefore the Co-op might reasonably assert that a failure to pay constitutes a violation of law. This would be a non-monetary default under the Proprietary Lease, triggering applicable notice and grace periods. But meanwhile…

2.  Co-op Obligated to Pay Before Collecting. The Co-op has to pay the PAT Tax at the same time its real estate taxes are due, regardless of whether it has collected the tax payment from the shareholder. Many mortgage lenders to Co-ops escrow for real estate taxes and require payment before the due date of the next installment. We question whether a lender will allow a Co-op to segregate its tax bill and pay only building-wide assessments while it waits for payment from a shareholder.

Furthermore, Co-ops that escrow usually don’t even receive their tax bills. (They get sent to the lender.) So the Board might not even be aware which shareholders are liable for PAT Tax payments before they are due. At the same time, the lender usually draws from the escrow account automatically without alerting the Co-op of specific changes. This means that the Co-op might pay the tax even before it bills shareholders.

Recommendation:  Boards should conduct an independent review proactively. If you think someone in your building might be responsible to pay PAT Tax, you might alert them beforehand. Management should also download a copy of your property tax bill at least one month before your due date so that you can bill the shareholder. You can also try to get your bank to send you copies of property tax bills upon receipt. Note – real estate tax bills are available online.

3.  Long Time to Recover Improper Payments. The Co-op has to pay the PAT Tax even if the shareholder is contesting The statute does not allow the Co-op to delay a payment even if the shareholder objects or fails to pay it. Hearings on tax payments are scheduled when the City reviews protests on assessments. Review and reversal can take several months or even years.

In sum, the Co-op is turned into the collection agent for the City without receiving the authority to enforce it, without being given the same rights to contest the validity of the Tax as the shareholder, and without recourse to delay payment if the shareholder refuses to pay.

The Department of Finance has published proposed rules for the implementation of the PAT Tax, available HERE. The rules focus primarily on proof of primary residence and hearing procedures, though, rather than valuation.

            What Happens in 2027?

Prognosis. To put it politely, the first year could involve a considerable degree of uncertainty and disruption, especially for luxury Co-ops. The Department of Finance may not have ready access to schedules of share allocations, shareholder names and primary residence information to determine what may be a covered unit and whom to bill. They may have to rely first on the primary residence filings for the Co-op/Condo Tax Abatement to see who is exempt, and infer from that what units are not exempt. They might be able to make use of ACRIS filings as well to locate co-op sales over the threshold and analyze from there, bearing in mind that “fair market value” is not the same as “assessed market value.”

We expect confusion on the part of many entity condo and co-op owners as to whether they are exempt from the tax, particularly on primary residence grounds. The City’s proposed rules do not answer many questions. We anticipate numerous disputes between shareholders who are unfairly charged and the unfortunate Co-op Boards tasked with collection. Meanwhile, the Co-op has to pay regardless.

            What Happens in 2028?

Beginning July 1, 2028, the Department of Finance intends to determine “market value” utilizing sales of comparable apartments as a guideline. To compensate, the “market value” threshold will rise to $5,000,000, but that almost guarantees that “fair market value” will replace the “assessed” market value as a measure.

Even with the change, currently Co-ops will not be relieved of the obligation to pay the PAT Tax on shareholders’ behalf. It only expands the number of potential payors who might complain. The only way to take Co-ops off the hook is to develop valuation records for individual co-op apartments similar to other types of real property and bill shareholders directly.

We also see the PAT Tax as the thin edge of the wedge to taxing co-op and condo units like single-family homes — that is, the first step toward changing the state’s cumbersome tax classification system to assess real estate taxes based largely on individual apartment sales rather than parsing the rental value of the entire building. Right now, owners of apartments in the City might like that since multi-family dwellings in New York City are assessed at a much higher relative valuation than single-family homes. (That’s why we have the Co-op/Condo Tax Abatement, to equalize that discrepancy.)  But if the State authorizes a different cap on assessments of apartments from single-family homes in order to take co-op and condo units into account, taxable valuations of individual co-op and condo residences in the City could increase significantly. Having individual valuation data also enables the State and City to expand the number of units subject to this (or another type of) tax surcharge.

Interestingly, the opposite is true outside of New York City. There most communities value single-family homes much more highly (based on sale price) than rental properties (which assessed on an “income” basis). Therefore high-rise co-op and condo associations fight to make sure that their municipalities continue to assess them like rental buildings. Some municipalities have already adopted the “Homestead Act”, which enables them to assess condo units based on individual sales rather than as parts of rental buildings. The valuation procedures developed under the PAT Tax may make it easier for towns to justify broader implementation of the Homestead Act and treat all types of single-family residences the same way.