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In an ambitious and controversial move to address New York City’s housing affordability crisis and generate new revenue streams, New York City introduced a pied-à-terre tax for high-value non-primary residential properties in New York City, effective July 1, 2026. However, the tax has faced immediate scrutiny and legal challenges. The tax targets high-value secondary residences, imposing a surcharge based on property valuation, initially calculated through rental income and later shifting to comparable sales data.
The pied-à-terre tax is structured as an annual surcharge rather than a transactional transfer tax and employs a two-phase valuation approach. Initially, during Phase One, residence values will be based on current values assessed by the Department of Finance, which are used for determining NYC annual real property taxes. Class One (one- to three-family) homes are divided into three brackets based on assessed market value: (i) homes between $5,000,000 to $15,000,000 are subject to a 0.8% rate, (ii) homes between $15,000,001 and $25,000,000 are subject to a 1.05% rate and (iii) homes over $25,000,000 are subject to a 1.3% rate. For condos and co-ops, (i) units between $1,000,000 and $3,000,000 are subject to a 4.0% rate, (ii) units between $3,000,001 and $5,000,000 are subject to a 5.25% rate and (iii) units over $5,000,000 are subject to a 6.5% rate.
During Phase 2, beginning July 2028, properties will be valued based on comparable sales data. Phase 2 rates for Class One homes will remain the same as Phase 1; however, rates for condos and co-ops will be reduced such that (i) units between $5,000,000 and $15,000,000 will be subject to a 0.8% rate, (ii) units between $15,000,001 and $25,000,000 will be subject to a 1.05% rate and (iii) units over $25,000,000 will be subject to a 1.3% rate.
Condos and co-ops are intentionally subject to a higher rate than Class One homes during Phase 1. Currently, condos and co-ops are valued using an income-based method, which may result in market values lower than actual sales prices. To produce a tax burden comparable to Class One homes, rates during Phase 1 are set higher to compensate for the suppressed value base. Because properties are valued using comparable sales data in Phase 2, higher rates are not needed to produce a comparable tax burden.
For co-ops, the tax is paid by the co-op itself in the same manner as real property taxes, then charged back to shareholders. Unpaid surcharges could result in a tax lien against the entire building rather than just the specific unit associated with the non-paying shareholder. This lien could cloud title at the building level and potentially affect sales or financing for unrelated shareholders. Additionally, because individual co-op units do not have separate tax lots, valuation complexities and enforcement issues may arise, especially if properties are valued based on comparable sales or rental income rather than assessed value.
Example – Phase 1
Consider a unit in a luxury co-op in Manhattan valued at $2 million based on its rental income during Phase 1. Because the assessed value exceeds $1 million, the owner is subject to the pied-à-terre surcharge. Applying a 4% rate for properties valued between $1,000,000 and $3,000,000, the owner would owe an annual surcharge of approximately $80,000 (4% of $2,000,000). This surcharge is payable annually, similar to property taxes, and must be paid by the co-op, which then recovers the amount from the shareholder through common charges. For the first fiscal year (July 1, 2026 to June 30, 2027), the tax is due on January 1, 2027.
Example – Phase 2
Starting July 1, 2028, during Phase 2, the same unit's valuation will be based on comparable sales data, which may increase its assessed or market value. For example, suppose the unit is valued at $6,000,000 based on comparable sales data. With the applicable thresholds for Phase 2, the surcharge would now apply at a rate of 0.8%, resulting in an annual surcharge of approximately $48,000 (0.8% of $6 million). As noted above, the surcharge will be paid annually by the co-op corporation, which will recover the amount from the shareholders. For future fiscal years, the tax will be due in semi-annual installments due on July 1 and January 1.
Exemptions
The law exempts certain properties from the pied-à-terre tax. While not exhaustive, exempt properties include (i) primary residences, (ii) properties occupied by immediate family members, which includes a spouse, child, sibling, parent, grandparent or grandchild and (iii) properties leased to a tenant who occupies the property as a primary residence under a bona fide, arm’s-length agreement for at least one year. Taxpayers may utilize these exemptions to mitigate or eliminate the tax. The primary residence exemption, which requires that the property be occupied in aggregate for a majority of days during the calendar year by a “covered owner” (or a family member of a covered owner, or a lessee/renter), may provide an avenue to mitigate the tax. If a property owner can ensure that the property is occupied by (i) themselves, (ii) a family member or (iii) a lessee/renter for a majority of days in a calendar year, the property will not be subject to the tax. Thus, whether and how a residence is occupied may become a litigated issue as taxpayers employ strategies to mitigate the tax.
Property Owned by an Entity
If a property is owned by an entity, including a trust, limited liability company or corporation, the primary residence exemption is available only through a statutory look-through rule. For trusts, the covered owner is the beneficial owner(s) if they are the sole beneficiary of the trust. If such sole beneficial owner is a natural person using the property as their primary residence, the exemption may be available. For partnerships, corporations and limited liability companies, the covered owner is the partner, shareholder or member holding a majority interest in such entity. Like a trust, if such majority holder is a natural person using the property as their primary residence, the exemption may be available. However, if another entity holds the majority interest, there is no second look-through into the entity holding a majority interest. The statute provides no guidance on whether the look-through rules apply across multiple tiers, i.e. if real property is owned by a limited liability company in which a trust is the sole member, leaving room for confusion for taxpayers.
Challenges to the Tax
The tax has already faced significant challenges. On August 10, 2026, a New York State court issued a temporary restraining order (TRO) barring the New York City Department of Finance from imposing and collecting the tax. The judge stated that notices sent to homeowners caused irreparable harm because such notices did not explain why recipients had been identified for the surcharge and warned that homeowners who failed to file for an exemption would be subject to the tax. Under the TRO, the city was ordered to take down the public tax roll and was barred from issuing additional notices while the TRO is in effect. However, the TRO was lifted on August 13, 2026, and a Brooklyn Appellate court ruled that the City can continue the rollout while legal proceedings continue. The deadline for exemption applications has been further extended to October 6, 2026. While the tax is subject to challenges, some of which are working their way through the legal system, the tax is currently still in effect, and taxpayers should plan accordingly. Unless renewed, the tax is currently scheduled to sunset on June 30, 2031.
Trends Across the Nation
The pied-à-terre tax on New York City properties may be part of a larger trend across American cities, whether driven by an effort to develop new revenue streams for cities or to deter out-of-state buyers. Other states, including Rhode Island, Hawaii and Montana, have implemented similar taxes on properties that are not primary residences.
Needed Planning
Navigating the complexities of New York City’s pied-à-terre tax, as well as related continuing legal developments, requires expert guidance. As this tax structure evolves, owners, investors and developers should proactively assess if and how these changes impact their properties. Failing to plan could result in unexpected liabilities, liens, and/or diminished property value. If you own a property that could be impacted or have already received a notice regarding this tax, please contact us so that we can assist in navigating these rules and mitigate the impact of this new tax to the greatest extent possible.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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