Discussing tax rules and regulations may be about as exciting as watching paint dry but I’ll do my best. Bear in mind, however, that sometimes the most impactful moments, economically speaking, are wrapped in a bundle of boredom. So, pay attention if you own any type of property in New York City.
Overview of NYC’s Property Tax System
For decades, many have correctly pointed out that NYC’s property tax system is fundamentally unfair as it imposes unequal tax bills on similarly appraised properties that bear little relationship to actual market value. For example, have you ever wondered why a $12 million townhouse in the West Village has an astoundingly low annual tax bill while a six-unit fully rent stabilized property in Ridgewood, Queens with a value of $800,000 could be excessively high relatively speaking?
To answer, I need to take you back to 1981 when NYC passed Article 18 of NY’s Real Property Tax Law. The law slotted every building into one of four different tax classes and allowed the use of so called fractional assessments of the property’s market value for purposes of determining its taxable value. Class One properties, or one to three families, are assessed using 6% of their market value while the other three classes are assessed at 45% of their market value.
Calculating Property Taxes in NYC: Two Examples
To illustrate how this works in practice, let’s go back to that $12 million townhouse in the West Village and compare that annual tax bill to a 45-unit multifamily property in Upper Manhattan with a market value of $5 million. To calculate, the city starts with the market value ($12 million/$5 million) and then applies a 6% fractional assessment to the townhouse (i.e., a $720,000 assessed value) as it falls in Class 1 and 45% to the multi-family as it falls into Class 2 (i.e., a $2.25 million assessed value). The varying tax rates are then applied to each of the assessed values so, in the case of the townhouse, ownership would pay approximately 20% of the assessed value or $144,000 and, for the multi-family, 12.5% of the assessed value or $281,250. To me, it doesn’t seem terribly fair that the owner of the $12 million townhouse pays about half in property taxes than the landlord of the $5 million multi-family.
The Benefits of Owning Condos and Coops Built Pre-1974
To further highlight the nonsensical approach employed by the city, one need only look at how they assess condos and coops for tax purposes. NYC compares condos and coops constructed before 1974 (about 98% of all NYC coops) to rental properties built before 1974 which are typically comprised of a bevy of rent stabilized units with market values significantly below any condo or coop. In many cases, this approach leads to the city using market values for coops and condos that are between 50%-80% lower than their true market values. As a result, these properties are taxed at levels that are completely out of sync with their true market value.
Enter Tax Equity Now NY to Fight the Good Fight
Fed up with the lack of political progress, Tax Equity Now NY (TENNY)—a coalition of real estate, civil rights, and housing advocacy groups—is taking its push for property tax reform to the courts. In a ruling earlier this year, an appeals court allowed several TENNY claims to proceed with an upcoming court date scheduled to commence on September 17, 2024. The continuation of the case is an acknowledgment by the court that inequities exist, setting the stage for a comprehensive review of the current property tax regime in NYC.
In short, NYC’s property tax system has been an unmitigated disaster for some time and when factoring in the recent rule changes surrounding rent regulation and good cause eviction, ownership of commercial and multi family properties isn’t what it once was. However, with this new TENNY case, pressure may be mounting on city officials and legislators alike for change. We are long overdue for an equitable redistribution of the tax burden among the various property types based more on true market value and less on convoluted tax classifications and fractional assessments impenetrable to all but the few tax attorneys and accountants who no doubt relish these puzzles and the high fees they command. I tip my hat to these professionals but simplicity and fairness are in order your honor.
Sources: NYC Property Tax Lawsuit Advances: Could It Propel the Five Borough Fair Property Tax Act? | Rosenberg & Estis, P.C. (rosenbergestis.com) New York Court of Appeals Permits Challenge to New York City’s Property Tax System – Gibson Dunn A New York City Property Tax Overhaul? It Could Finally Happen. – Commercial Observer NYC Property Tax Reform Legislation Proposed | Rosenberg & Estis, P.C. (rosenbergestis.com) Tax Equity Now
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