A judge dealt a major setback to one of Mayor Zohran Mamdani’s key initiatives this week, ruling that New York City had mishandled the rollout of its contentious tax on high-end second homes and must start the process over.
The city immediately said it was appealing the decision, adding that it planned to proceed with the rollout until the higher court weighed in. Still, more challenges emerged as two additional lawsuits were filed this week arguing that the tax is unconstitutional. Together, the legal actions brought fresh scrutiny to New York City’s notoriously complicated property tax system.
Mr. Mamdani campaigned on a promise to “tax the rich.” But, in addition to legal action, the bumpy rollout of the tax plan drew complaints from homeowners and even a light reprimand from Gov. Kathy Hochul, who first unveiled the policy in the spring.
Here are answers to some of the biggest questions about the second-home tax.
Who is being taxed and why?
The tax, levied as a surcharge on property tax bills, must be paid by people who live outside the city most of the time while also owning a high-value second home, often known as a pied-à-terre, in the city.
Ms. Hochul swiftly pushed the policy through the State Legislature to help close the city’s budget gap. It was a compromise between Mr. Mamdani, a democratic socialist, and the governor, a moderate Democrat who has generally opposed tax increases in an already high-tax state.
If a second home is in a one-, two- or three-family building that has a “market value,” as calculated by the city, of more than $5 million, the surcharge rate starts at 0.8 percent and rises gradually with the value of the home. For co-ops and condos with a “market value” of more than $1 million, the rate starts at 4 percent. (This “market value” metric doesn’t directly correlate to a home’s actual sale price; more on that below.)
With the surcharge, the annual property tax bill on a condo with a “market value” of $2 million, for example, would increase by $80,000.
The city and state carved out some exceptions. The tax does not apply if the home is being rented to someone, or if a relative of the owner lives there most of the time.
How can the city determine whether a property is a pied-à-terre?
It’s complicated.
To determine which homes should be subject to the tax, the city first filtered out properties that were not valuable enough. Then it filtered out homes the city knew received certain tax breaks — such as those for veterans or older people — that require the property to be a primary residence.
That left about 17,000 properties. About half of that subset had murky ownership: They were held, for example, by limited liability companies whose owners might not be city residents, or by trusts whose beneficiaries might live elsewhere. Still others appeared to be owned by out-of-towners, but it wasn’t clear if they were being rented to New Yorkers.
The city decided the quickest and simplest way to figure out if these properties were pieds-à-terre was to send letters to the owners asking them to demonstrate residency. Owners could upload a copy of a lease to show that the home was being rented out, or a copy of a driver’s license to show that they lived at the address.
Still, many people who received the letters protested that they were longtime residents and should not have to prove it. A group of homeowners, represented by Randy Mastro, a former first deputy mayor in the Eric Adams administration and a critic of Mr. Mamdani’s, filed a lawsuit over the rollout.
The lawsuit did not challenge the legality of the tax itself. Instead, the homeowners said the city had not done enough to figure out who should be subject to the tax before sending notices to property owners.
The judge, Wayne M. Ozzi of State Supreme Court on Staten Island, agreed. “Homeowners are being substantially harmed and penalized needlessly” by the city’s “method of implementing the tax law,” he wrote in his order on Tuesday.
What was the big ‘list’ of properties published by the city?
On July 24, the city’s Finance Department published online what it called a “supplemental market value roll,” which contained data on nearly one million properties, including the value of the property, its address and the name of its owner.
But most of the properties listed were not second homes, and within days, outrage began bubbling online, with opponents of the mayor saying he was “doxxing” wealthy New Yorkers. Some expressed a fear that simply being on the list meant they would have to pay the tax. The lawsuit brought by Mr. Mastro also argued that the city should not have published the information.
The city’s position is that the legislation that created the tax required it to publish the data. City officials have also pointed out that tax rolls containing much of the same information are made public every year.
As criticism built, however, the city tacitly acknowledged that its messaging had contributed to the confusion. It eventually added a highlighted section online that read, in bold, “The listing of property on this roll does not mean that it is subject to the surcharge.”
Justice Ozzi’s order, if it stands, would require the city to remove that list and publish a more precise one that includes only properties that would be subject to the tax.
Why is the value threshold $5 million for some homes and $1 million for others?
Mr. Mamdani has said the tax applies to homes with a “market value” of $5 million or more. But the law says it also applies to co-ops and condos with a “market value” of at least $1 million.
The reason for the discrepancy is rooted in the city’s convoluted property tax system. It starts with how the city assesses the value of co-ops and condos — a technique that drastically underestimates how much high-end co-ops and condos are actually worth on the market.
The city counterintuitively does not use sales comparisons or recent listings to assess condos and co-ops. Under a state law passed in the 1980s, the city is required to compare the units and buildings to rentals of similar size and age, based on the potential income those rentals might bring in. For the highest-end condos and co-ops, there are essentially no directly comparable rentals, leaving only imperfect matches that often include buildings with much cheaper rent-regulated units.
That drags down the assessments. As a result, a condo or a co-op with a “market value” of $1 million is probably worth a lot more.
How will the city handle co-ops?
Ownership of condos and single-family homes is relatively straightforward: The people or entities that own the units are listed on deeds and property tax records, and they will receive a tax bill.
That’s not the case for co-ops. Buyers of co-op units are actually purchasing shares of a corporation, which is run by a board of directors. That board is responsible for collecting the surcharge — and the entire corporation will be on the hook if the residents of one unit that owes the tax does not pay.
How much money will the city get?
Mr. Mamdani and other officials project the tax will raise $500 million in the first fiscal year.
The actual number is not yet known and most likely won’t be until the spring of 2027, after property owners have a chance to challenge the city’s assessments in order to reduce the assessed value of their homes, and thus their tax bills.
The total number of properties that will be taxed is also still being determined. The Finance Department is fielding requests from people who say their homes are not actually subject to the tax. Already, the city has approved at least 4,700 applications for exemptions, with thousands more in the queue.
And it’s not clear whether some people will sell their second homes to avoid the tax, which could lower the revenue it generates.
Most projections, however, suggest the sum of the revenue collected is likely be in the hundreds of millions of dollars.
What comes next?
The judge ordered the city to restart its process of determining which properties were subject to the tax and sending notices to the owners. As the city appeals the ruling, it is unclear whether the order will affect the city’s ability to collect the money by the end of the fiscal year.
There are also the two lawsuits filed this week, which seek to overturn the tax.
The first, filed on Monday, was brought by former Commerce Secretary Wilbur Ross, his wife, Hilary Geary Ross, and the casino mogul Steve Wynn, all of whom live in Florida but own second homes in New York City. Notices from the city indicate that the Rosses would owe roughly $83,000 and Mr. Wynn about $183,000 under the tax, according to the lawsuit.
The second suit, filed on Tuesday, was brought by the corporation that owns an Upper East Side co-op building known as the Montclair, as well as a handful of homeowners, including some who live in Florida and in Suffolk County on Long Island.
Both lawsuits, which were filed in State Supreme Court in Suffolk County, argue that the law that established the tax violates provisions of the State Constitution that limit how much the city can collect in real estate taxes every year. The suits also argue that the tax is discriminatory because it applies only to residents of states other than New York.
Assuming the tax stays in place, in 2028, the city will develop a new and presumably more accurate system for collecting the tax that uses sales of comparable condo or co-op units to better assess market values.
Those worth $5 million or more based on that new assessment would be subject to the second-home tax. Homeowners’ regular property tax bills, however, would still be governed by the old, oft-criticized rental comparison method.
The post What to Know About New York City’s Second-Home Tax appeared first on New York Times.
