New York City homeowners trying to escape their pied-\u00e0-terre tax liability have a slew of legal strategies to consider as they await their first bills, according to practitioners. <\/p>\n
Property owners expecting to pay are likely weighing their strongest options while waiting to see if initial backlash<\/a> will prompt any changes from the city, said Morgan Lewis & Bockius LLP tax partner Cosimo A. Zavaglia<\/a>.<\/p>\n 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<\/a> by targeting the wealthy<\/a>. <\/p>\n The city\u2019s tax on non-primary residences \u2014 which reaches single-family homes with market values of at least $5 million, and co-ops and condominiums worth at least $1 million \u2014 will likely see more challenges once property owners have to start paying, according to Hodgson Russ LLP tax partner Timothy Noonan<\/a>.<\/p>\n One such challenge could look much like a claim filed last month<\/a> against Rhode Island\u2019s new tax on second homes, which levies<\/a> 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\u2019s dormant commerce clause by effectively discriminating against owners who can\u2019t vote in the state. <\/p>\n But New York City\u2019s new levy presents more complex issues than Rhode Island\u2019s second home tax. Those who want to challenge the city\u2019s 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<\/a>. <\/p>\n \u201cThere are all kinds of implementation and application questions that are much more complex and nuanced than we see with the Rhode Island tax,\u201d he said. In his view, homeowners would be wise to target those issues.<\/p>\n \u201cIf you can do that \u2014 if you can get exempted, essentially \u2014 you don\u2019t even have to worry about constitutional arguments that you\u2019re probably going to lose anyway,\u201d Appleby said.<\/p>\n Easier Targets<\/p>\n 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.<\/p>\n For the tax\u2019s 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<\/a> late August to apply for exemptions, but the deadline was extended to Sept. 18 and then again to Oct. 6.<\/p>\n A group of homeowners trying to delay<\/a> the implementation of the levy in state court argue the publication<\/a> of an expansive preliminary roster of properties potentially subject to the tax caused \u201cmass confusion\u201d and exposed sensitive information to scrutiny. <\/p>\n Any state considering a second home tax risks similar attacks if they don\u2019t provide a clear system for notice, valuation, and appeals, said Andrew Leahey<\/a>, Drexel University School of Law professor and Bloomberg Tax columnist<\/a>. <\/p>\n The troubled launch is just one vulnerability homeowners looking to dismantle the levy could target. Others include the tax\u2019s potential application to residents who own their homes through multi-tiered LLCs and the compliance burden<\/a> for certain properties like co-op buildings.<\/p>\n Owners could also argue the levy is a property tax masquerading as a surcharge, Zavaglia said.<\/p>\n The state\u2019s constitution caps the revenue New York City can raise with property taxes at 2.5% of taxable property\u2019s average market value over the previous five years. <\/p>\n \u201cIt\u2019s a constitutional guardrail that prevents the city from arbitrarily spiking property taxes to close sudden budget deficits,\u201d Zavaglia said. \u201cSo 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?\u201d <\/p>\n The NYC Department of Finance and Mamdani\u2019s office didn\u2019t respond to requests for comment. <\/p>\n Question of Application<\/p>\n While Appleby said arguing the pied-\u00e0-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\u2019s messaging around the tax could bolster a discrimination claim. <\/p>\n 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 \u201cnone of these people can vote against me or any of you because they\u2019re nonresidents.\u201d<\/p>\n