New York City homeowners trying to escape their pied-à-terre tax liability have a slew of legal strategies to consider as they await their first bills, according to practitioners.

Property owners expecting to pay are likely weighing their strongest options while waiting to see if initial backlash will prompt any changes from the city, said Morgan Lewis & Bockius LLP tax partner Cosimo A. Zavaglia.

The mobilization comes as Mayor Zohran Mamdani (D) moves to implement this key part of his agenda, and as state and local governments nationwide try to close budget gaps by targeting the wealthy.

The city’s tax on non-primary residences — which reaches single-family homes with market values of at least $5 million, and co-ops and condominiums worth at least $1 million — will likely see more challenges once property owners have to start paying, according to Hodgson Russ LLP tax partner Timothy Noonan.

One such challenge could look much like a claim filed last month against Rhode Island’s new tax on second homes, which levies an additional $2.50 charge on every $500 of value that a non-owner occupied home is assessed above $1 million. Dozens of property owners alleged the tax violates the US Constitution’s dormant commerce clause by effectively discriminating against owners who can’t vote in the state.

But New York City’s new levy presents more complex issues than Rhode Island’s second home tax. Those who want to challenge the city’s surcharge in court have easier options to consider before bringing a facial discrimination claim under the commerce clause, according to University of Tennessee Law School professor Andrew Appleby.

“There are all kinds of implementation and application questions that are much more complex and nuanced than we see with the Rhode Island tax,” he said. In his view, homeowners would be wise to target those issues.

“If you can do that — if you can get exempted, essentially — you don’t even have to worry about constitutional arguments that you’re probably going to lose anyway,” Appleby said.

Easier Targets

Once New York City begins denying exemption applications, suits alleging the tax is unconstitutional as applied to specific homeowners could start rolling in. Those as-applied challenges will come with lower burdens of proof than declaratory judgment actions claiming the tax is facially discriminatory.

For the tax’s first two years, eligible owners of single-family homes will pay rates from 0.8% to 1.3%, while co-ops and condominium owners will pay rates from 4% to 6.5%. Property owners who received notice they may have to pay originally had until late August to apply for exemptions, but the deadline was extended to Sept. 18 and then again to Oct. 6.

A group of homeowners trying to delay the implementation of the levy in state court argue the publication of an expansive preliminary roster of properties potentially subject to the tax caused “mass confusion” and exposed sensitive information to scrutiny.

Any state considering a second home tax risks similar attacks if they don’t provide a clear system for notice, valuation, and appeals, said Andrew Leahey, Drexel University School of Law professor and Bloomberg Tax columnist.

The troubled launch is just one vulnerability homeowners looking to dismantle the levy could target. Others include the tax’s potential application to residents who own their homes through multi-tiered LLCs and the compliance burden for certain properties like co-op buildings.

Owners could also argue the levy is a property tax masquerading as a surcharge, Zavaglia said.

The state’s constitution caps the revenue New York City can raise with property taxes at 2.5% of taxable property’s average market value over the previous five years.

“It’s a constitutional guardrail that prevents the city from arbitrarily spiking property taxes to close sudden budget deficits,” Zavaglia said. “So the question is, can the legislature take a tax that operates like a property tax outside of the ordinary property tax framework simply by labeling it a separate surcharge?”

The NYC Department of Finance and Mamdani’s office didn’t respond to requests for comment.

Question of Application

While Appleby said arguing the pied-à-terre tax discriminates against non-residents may be tough since the levy also reaches in-state residents with second homes, Noonan countered that the city’s messaging around the tax could bolster a discrimination claim.

Homeowners targeting the Rhode Island tax said the legislative record indicated non-residents were deliberately targeted. During hearings, a bill sponsor allegedly said the tax may anger property owners, but “none of these people can vote against me or any of you because they’re nonresidents.”

New York City homeowners could similarly point to a promotional video Mamdani filmed outside Ken Griffin’s $238 million penthouse — where Mamdani said the tax was designed for “those who store their wealth in New York City real estate, but who don’t actually live here,” according to Noonan. The city also issued a press release that trumpeted a focus on reaching ultrawealthy “global elites.”

However, Appleby noted messaging won’t spell doom for the surcharge if its application isn’t effectively discriminatory.

The pied-à-terre tax’s focus on property use may further bolster it against a discrimination challenge, Leahey said. Rhode Island’s tax employs an owner-focused test which generally asks whether the property is the owner’s primary residence, while the pied-à-terre tax employs a use-focused test which asks whether the property is used as a principal residence.

That gives the city “a stronger argument that the distinction is between primary housing versus secondary luxury housing rather than residents and nonresidents,” Leahey said.

State courts have also been dubious that activities essentially done for personal consumption can even be considered commerce. Appleby said New York courts have upheld the convenience of the employer rule because an employee choosing to live out-to-state does so for personal reasons that don’t implicate commerce.

When states tax the choice to own a second home, “there is a question as to whether the commerce clause applies at all,” he said.