The Impact Of New York’s Pied-à-Terre Tax On Homeowners

Highlights

• In the weeks since New York City's enactment of a Pied-à-Terre (PAT) tax, or surcharge, on homeowners in late May 2026, multiple additional flaws in the legislation, including those contained in the rules issued on July 10, 2026, have become apparent.
• Chief among these is the way the PAT Tax is calculated and allocated among apartments in Phase 2 starting on July 1, 2028. It is not only an incorrect calculation but an apparent attempt to force co-ops and condos to be subject to an unfair tax system in the future.
• This Holland & Knight alert reviews the state of the tax and how it will affect the owners of co-ops, condos, and 1-3 family houses presently and in the future.

As troubling as New York's Pied-à-Terre Tax Law (PAT Tax) may seem, its implications and harbinger of future events appear far worse. On June 4, 2026, Holland & Knight published an alert, "New York State Enacts Pied-à-Terre Tax on Expensive Non-Primary New York City Residences," detailing the PAT Tax. In the last few weeks, additional flaws with the PAT Tax Law have become apparent, especially as a result of rules issued by the New York City Department of Finance (DOF) on June 5, 2026. Moreover, one of the most egregious parts of the flawed PAT Tax Law is that it utilized a methodology for assessing real property taxes that was criticized in a January 18, 2022, alert discussing New York City Mayor Bill DiBlasio's 2022 tax blueprint, which is now going to be used because it is easy even if it is unfair.

Future Assessment of Co-Op and Condo Taxes

The biggest, unspoken issue contained in the PAT Tax Law is the way the PAT Tax is calculated and allocated among apartments in Phase 2 starting on July 1, 2028. It is not only incorrect but an apparent attempt to force co-ops and condos to be subject to an unfair tax system in the future.

Moreover, the Phase 2 system and DiBlasio's blueprint ignore how the city should tax the owners of co-op and condo apartments because the share of each co-op or condo apartment is not based on comparable value but on the apartment's size and location and was based on satisfying the "reasonable relationship test" at the time the building became a co-op or condo. The issue is what method the assessors should utilize in determining the Fair Market Value of co-op apartments and condo units and, therefore, the taxes paid by co-op and condo owners and how inappropriately this was addressed by the New York State legislation and supported by Gov. Kathy Hochul in enacting the PAT Tax Law.

Unlike rental buildings that have a single owner, co-op and condo buildings have multiple owners whose interests in the building are not based on the Fair Market Value of their units or apartments in comparison to the other units or apartments because their share was based primarily on comparable size and the location of the apartment at the time the apartment became a co-op or condominium. Moreover, if the apartments were ever based on value, it would have been when the building first became a co-op or condo, which could have been a century ago.

There are three approaches to allocating the taxes. The first is aggregating the Fair Market Value of all units/apartments in the building. The second is preparing an appraisal of the building based on what the building would be worth if it was sold currently regardless of whether it is a co-op or condo. In either event, the taxes should not be allocated based on percentages. The first two seem to be what is being done under the PAT Tax Law. The third approach requires a separate assessment of each apartment.

The problem with the first approach is that it would mean that the person living in an unimproved one-bedroom apartment on the first floor of the building would have their taxes increased when the penthouse is sold for an astronomical price because the increased tax on the building would be allocated to each apartment or unit based on the pro rata share of the shares or common interests allocated to the unit and not the value of the residential units. Accordingly, if not done carefully, the new tax system would hurt anyone owning an apartment worth less than the most expensive apartment in the building. Similarly, if the assessment is based on the aggregate value of the building (the second approach), the same problem results.

The third alternative would require that each apartment be assessed separately. Because value would be based on an apartment's condition, it is not something that artificial intelligence could determine either. It would also necessitate every co-op apartment in New York City being given a separate block and lot number and amending the organizational documents of every cooperative corporation to deal with the responsibility for the Real Estate Tax payment and relative priority of liens. Although that would be the only fair way to utilize a system based on Fair Market Value so that no one would be hurt by the condition of someone else's apartment, it appears that is not what is going to happen. It is also the only way that improved apartments would not impact unimproved apartments.

The biggest hurdle is how to implement a system that would be fair to all of New York City's homeowners, and it is also the reason why a temporary co-op and condo abatement has been in place for 30 years, because there is no simple solution to the allocation issue. However, the solution is not ignoring the value of apartments/units. Ironically, in 1954, when the U.S. Congress was adding Section 216 to the Internal Revenue Code, lawmakers recognized that share allocation could not be based on relative value, so they utilized the "reasonable relationship between shares and space criterion." The U.S. House of Representatives committee's report noted that basing it on value would necessitate changing all the shares every time a sale occurred. Likewise, New York's Condominium Act (Real Property Law Section 339-I) provides four alternative mechanisms for setting the percentages, but value is rarely used because it does not reflect the operating costs that will be shared by the unit owners.

Another shocking error in the PAT Tax Law is that co-op and condo owners who file New York City and New York state tax returns and pay New York City and New York state income taxes are still obligated to pay the PAT Tax on homes in the city that are not their primary residences. This means that the rationale for the PAT Tax that it is directed to the wealthy who do not pay local taxes is not true.

An additional issue ignored by drafters of the PAT Tax Law is that it assumes that purchasers move into their homes as soon as the closing occurs and ignores purchasers of apartments that need a complete renovation, which can take 12 to 18 months, or apartments that are vacated due to casualty, renovations, death, hospitalization or institutionalizations. Based on the terms of the PAT Tax Law, the owners will be forced to pay the PAT Tax until they move into or back into their apartments or even if they file tax returns and pay city and state taxes but do not occupy their homes.

Nevertheless, the largest burden is imposed on co-op boards, co-op owners and managing agents who live and work in New York City and pay New York City and state income taxes, bringing their aggregate tax burden to more than 50 percent of their income while hearing a chorus of "Tax the Rich" or "Pay Your Fair Share" from others. Even more shocking is that the co-op is responsible for the co-op's shareholders' taxes. Who in the state capital of Albany could have believed this could be fair and reasonable, assuming anyone read the legislation before it was enacted?

The burden placed on co-op boards is surprising since co-ops, which have been in New York City for almost 140 years, are being punished for their success as homeowners while tenants in New York City Housing Authority (NYCHA) housing, which is a classic example of why the government should not own or operate housing, live in considerably lower-quality housing environments.

Co-Op Board Preparation for the PAT Tax

In order to be prepared for the PAT Tax, every co-op and condo board, owner or managing agent should identify which apartments in each building might be subject to the PAT Tax by having a Phase 1 market value of more than $1 million or a Phase 2 market value of over $5 million, which can be accomplished by logging on to the DOF website and determining the market value assigned to each apartment to gauge the apartments that may be subject to the PAT Tax and if the apartment has an assessed value of $1 million and is not the owner's primary residence.

For co-ops: In the first two years, the PAT Tax is based on assessed value (AV), which is assumed to be 20 percent of market value. AV is determined by:

1. entering the DOF's Property Information Portal
2. selecting "Property Information Portal"
3. entering the building's borough, block and lot number or changing the search to the building's address
4. entering the "Assessment" portal or scrolling to the "Assessment" section; the "2026/27 Final Market Value" number appears on the left side of the box
5. dividing the "market value" by the total number of shares in the co-op, which can be found in the co-op's audited financial statements
6. multiplying the number of shares for each apartment by the assessed value per apartment

If the "market value" of any apartment is greater than $1 million, shareholders in the co-op may be subject to the PAT Tax if it is not their primary residence.

Determining the condo AV can be accomplished by:

1. repeating Nos. 1 and 2 above
2. entering the borough, block and lot number for each unit
3. repeating No. 4 above, which is the "2026/20207 Final Market Value" number

If the "market value" of a unit is greater than $1 million, the unit owner may be subject to the PAT tax if the unit is not their primary residence.

DOF's Rules Are Arbitrary and Capricious

Unfortunately, neither the PAT Tax Law nor the Rules issued so far by DOF contain any procedure for DOF to collect share allocation data from the co-ops. The system put into effect by the state legislature is a makeshift alternative and unfair to all owners of co-op apartments. Phase 1 requires DOF to multiply each building's market value (which is not an accurate number but a guess based on the assessed value of a "comparable rental building") by the individual unit's percentage of total shares, which DOF does not have, meaning that neither part of the equation is correct. The proposed rules establish no filing requirement or procedure for DOF to collect this information and no methodology for DOF to verify the data before it sends notices to the co-ops of whom DOF thinks may owe the PAT Tax on August 30, 2026. Without actual data, DOF cannot calculate imputed apartment values or determine which apartments have a $1 million Phase 1 threshold, precluding DOF from issuing valid notices. DOF is acting on a guess in collecting a tax from an entity that does not own it.

The problem that the legislature, governor and DOF ignored is that the PAT Tax Law requires DOF to transmit notices to property owners through the co-op boards. However, for co-ops, the co-op corporation is the owner of record but does not owe the tax, so why should it pay a tax it does not owe? The PAT Tax Law requires the co-op corporation to forward notices to affected shareholders "as soon as practicable," which could be an issue because the 30-day appeal window runs from the date of DOF's transmission to the co-op, not from the date the shareholder receives the forwarded notice. A board that takes even a few days to identify which apartment is included and forward the notice to the co-op shareholder is reducing the shareholder's appeal window, which could create liability for the board. Moreover, if a shareholder is traveling, they may not receive the notice before the appeals period expires. DOF's rules establish no minimum forwarding deadline, acknowledgment mechanism or safe harbor for boards that forward promptly but where delivery is delayed. This is a huge burden and potential liability for volunteer boards and unfair to the putative taxpayer.

DOF's rules limit market value correction procedures to fiscal years beginning on or after July 1, 2027; however, for the 2026-2027 fiscal year, the first year is retroactive to the January 5, 2026, taxable status date – a date five months prior to the bill's passage. Surprisingly, if DOF calculates an imputed value using incorrect share data and the value is wrong, there is no mechanism for the board or a shareholder to correct the underlying valuation. The only available appeal addresses residency status and not the accuracy of the imputed value calculation.

Another problem is that the aggregate surcharge for all non-primary apartments in a co-op building attaches as a lien on the entire co-op building, even if only one shareholder does not use the apartment as a primary residence. Neither the PAT Tax Law nor DOF's rules establish a grace period, a partial lien mechanism isolating the non-paying shareholder's apartment from the balance of the building and no procedure protecting the building from lien sale while a collection dispute with a shareholder is pending or between the shareholder and DOF. Moreover, DOF's rules fail to establish a mechanism giving the co-op board a priority claim on a departing shareholder's proceeds at closing to satisfy an outstanding PAT Tax obligation. The legislature, governor and PAT Tax Law just ignored the burden they placed on the co-op.

Furthermore, DOF's rules create a new verification obligation for boards. If an apartment is held in a limited liability company (LLC), trust or other entity, the board must now assess whether the entity structure satisfies the "undivided fee interest" or "all shares" before it can determine whether the primary residence exemption is even available. In reality, boards do not have access to the current underlying operating agreements, partnership agreements or trust instruments necessary to make that assessment without requesting sensitive financial and legal documents from shareholders, which will add an expense and potential liability for the board and co-op.

The shareholder has 30 days after the transmission of the notice to file an appeal with DOF, though the consequence of missing the deadline is not merely a delayed appeal but an unchallengeable determination that DOF's information is accurate. There is no extension mechanism, hardship waiver or cure provision in the proposed rules and, as a result of the absence of due process, there is no ability to go to court. The shareholder accused of not using his or her home as their primary residence has no recourse but to pay a tax they might not owe.

DOF's rules, such as the PAT Tax Law, establish that the most recently filed state or federal tax return as the proof of primary residence, which is a problem for 1) shareholders who recently moved into an apartment and have not yet filed a tax return reflecting the new address, 2) shareholders who maintain a tax domicile in another state for legitimate business reasons while genuinely living full-time in the New York City unit, and 3) shareholders who hold the apartment in a trust or an LLC and whose personal tax return does not list the property address at all. For all of these owners, the rules require assembling two alternative documents, such as a driver's license, voter ID card or other DOF-approved proof, each of which must indicate residency at the property on or before the taxable status date.

In terms of renting an apartment to avoid the PAT Tax, Section 62.01 of DOF's rules requires Fair Market rent in an "arm's length transaction," where "circumstances do not indicate a reasonable possibility that the lease or sub-lease was entered into for the purpose of avoiding imposition of the surcharge" but that is a subjective determination by DOF, an agency that has no oversight over its decisions because there is no recourse to a court. A shareholder who rents to an adult child at market rate has a qualifying lease, but the family relationship creates a "circumstance" DOF could use to challenge its arm's length character. The rules provide no safe harbor, objective rent benchmarks or clear standard for what DOF considers a reasonable possibility of avoidance motivation and creates substantial uncertainty for shareholders who rent to family members or establish leases after the PAT Tax was announced.

There are no rules on the inequity of applying the PAT Tax to January 5, 2026, the taxable status date, that preceded the law's enactment by more than five months, thereby making the PAT Tax a prohibited ex post facto law. An owner, who was a non-primary resident on January 5, had no knowledge that this date would be legally significant, obligation to document their residency status on that specific date or opportunity to cure the non-primary status before becoming liable. DOF's rules do not establish any transitional relief, retroactive limitation or documentation flexibility, which is a structural unfairness of the PAT Tax Law. Every co-op, condo and 1-3 family homeowner is simply held to the January 5 standard as if the law had existed for all of 2026.

DOF's rules are also silent on how the PAT Tax is allocated between a seller, who was a non-primary resident on January 5, and a buyer, who acquired the property and establishes primary residence later in the same fiscal year. There is no proration mechanism, transfer of liability provision or closing protocol. A buyer who purchases a former Pied-à-Terre in good faith as their primary residence inherits a building-level tax liability they had nothing to do with, with no guidance as to how to handle this problem, which means their attorneys will have to include it in the contract and closing documents or resolve it at closing. A suggestion has been made to create an escrow at closing, but because DOF has six years to audit the PAT Tax, who is going to agree to escrow what could be hundreds of thousands of dollars for six years? Who is going to remember the escrow's purpose and how much should be escrowed when interest accrues at 18 percent per annum?

DOF not only has six years after the closing to audit the submission but full subpoena power. A shareholder who certifies a primary residence document in good faith, even one who is a genuinely primary resident, can face an audit years later if circumstances change or if DOF develops new information suggesting the certification was inaccurate or even if DOF goes on a fishing expedition. It also establishes a risk for the co-op board for six years after a closing that the board may be obligated for the tax. The rules do not establish any standard for initiating an audit, threshold of suspicion DOF must meet before exercising subpoena authority or limitation on the scope of records DOF can demand. It appears the legislation treats law-abiding, taxpaying citizens as if they were criminals.

Issues for Boards to Consider

In order to provide some level of protection, co-op boards must have their legal counsel and tax certification counsel review the co-op's proprietary lease and bylaws to determine whether the board has the legal authority to take actions required by the PAT Tax Law, which they probably do not presently have. The boards will also have to consider how to handle apartments owned or being purchased by buyers as a Pied-à-Terre. All of these issues will have an impact on the value of apartments, which could fall due to the risk that the PAT Tax could fall on all the shareholders, and the interest charges will strain budgets. There is no doubt that boards do not have the right to stop existing shareholders from using their apartments as a Pied-à-Terre. This also raises a question as to at what point the board's actions create two classes of shares in violation of New York Business Corporation Law Section 501(c) and Internal Revenue Code Section 216 and as to whether boards be required to bill different shareholders differently.

There will also be issues as to whether boards can demand that their shareholders provide proof of whether the apartment is a primary residence and whether the shareholders pay New York City or state taxes. What does the board do if a shareholder does not use the apartment as a primary residence? Also, who will pay for all of this burden – the shareholders or the Pied-à-Terre shareholders? Boards cannot treat different shareholders differently. However, boards are also limited in what they can do as a result of the co-op's inclusion in the Housing Security and Tenant Protection Act of 2019, the statute that modified the rent regulations that somehow included co-ops.

Additionally, there is the question as to what boards have to disclose to buyers in light of DOF's ability to audit the PAT Tax payment in six years. The other action the boards should take is to require that every shareholder signed an Indemnification Agreement and a Submission to Jurisdiction on every co-op apartment sale in order to cover itself in the event that the soon-to-be former shareholder was determined to be a nonprimary resident during the next six years while DOF's extended statute of limitations claim is running or the remaining shareholders and new shareholders will be left holding the bag.

If a shareholder refuses to pay the PAT Tax, the board must decide between two unappetizing options: The board can pay the surcharge out of building funds, effectively advancing the nonpaying shareholder's PAT Tax obligation from reserves that belong to all shareholders or allow the surcharge to remain unpaid on the building's property tax account, where interest begins compounding at 18 percent per annum against the entire building while the board pursues the shareholder through whatever collection remedies its governing documents provide and through the New York court system at great expense, with no certainty of ever being reimbursed after the Housing Stability and Tenant Protection Act. Neither option is acceptable because both cause direct harm to innocent shareholders who have nothing to do with the non-primary unit. The bigger concern is that in future years, a litigator decides to sue a board for violating the Business Judgment Rule, resulting in personal liability because the board reacted to the PAT Tax Law without proper authority.

Most of this alert deals with the issues that will affect the cooperatives, but the condominiums and 1-3 family home owners will be significantly affected by the assessment system that DOF apparently intends to utilize in 2028 to claim that its synthetic valuations of similar buildings somehow replaces an actual appraisal, which is how property taxes are determined everywhere else in the U.S.

Managing Agents

There is also a huge burden on managing agents that comes with potential liability, which will necessitate charging the co-ops a fee for the additional work the agents will be required to do that entails risks to the agent. The co-ops will be obligated to pay a fee to the property managers to deal with the burden imposed by DOF and the PAT Tax Law on the co-ops. The proposed rules do not provide any guidance on the managing agents obligations, which will necessitate amending the management agreements may include the following: identifying which units may be subject to the Phase 1 threshold, compiling and submitting share allocation data to DOF, monitoring unit-level notice receipts and forwarding and tracking individual PAT Tax payments as separate line items separated from ordinary real property taxes, forwarding notices, answering shareholder questions about the appeal process and coordinating documentation collection, and tracking the six-year audit window means managers must maintain PAT Tax-related records across their entire portfolio for a minimum of six years for each apartment, which creates significant document retention obligations that are not referenced anywhere in the proposed rules. The managing agents will also have to be certain to obtain the prior agents records when the buildings change management companies.

Additional Flaws in the PAT Tax Law

1. The co-op apartment may be subject to a mortgage with the lender having a lien on the shares. The PAT Tax Law makes no accommodation for lenders who may not find out about the tax until more than 30 days after the notice is sent to the co-op. The affected apartments are subject to a recognition agreement, but the PAT Tax Law ignores the lenders and is not notifying them possibly resulting in the mortgagee interfering in DOF's lien against the shares or the building. In addition, if the lender escrows the tax payments in advance of their due date, will the co-op be required to escrow the PAT Tax with the lender when it learns that a shareholder may owe a Pat Tax and, if so, how can the co-op force the lender to pay the PAT Tax if the borrower is in default in paying its debt service?
2. The co-op building is probably encumbered by a mortgage, which is how the co-op has paid all of its unfunded mandates. If DOF places a lien against the building, the building's mortgagee could declare a default, default interest will apply and none of the shareholders will be able to sell their apartments. Since the PAT Tax is called a "surcharge" against the shareholder for not using the apartment as its primary residence, DOF will have to litigate on its lien priority and will probably lose.
3. What happens if DOF is wrong and the corporation and all the shareholders (including the primary resident who DOF thinks is not a primary resident) will DOF and the City of New York be liable for damages for its mistake? DOF does make mistakes, which have been seen repeatedly with the co-op and condo abatement.
4. Will DOF chase after an apartment owner who is in an assisted living facility or the estate of an owner who died and the estate is being probated? Will the estate and the co-op have to pay the PAT Tax and 18 percent interest? Perhaps the city government should take a look at Surrogate's Court, which is backed up and it takes years probating an estate.
5. Why has the legislature ignored complicated estates and trusts when all it needed to do was provide that if the beneficiary is living in the apartment, the apartment is not subject to the PAT Tax? Perhaps if there were hearings, they might have realized the complications that are involved.
6. The definition of an "arm's length transaction" is too restrictive and subjective considering how complex life has become in New York City.
7. The 30-day appeal period for determination by DOF as to who is a primary resident is too short. Businesspeople in New York are routinely sent abroad and across the country for lengthy periods and may not be able to produce records in a short period of time.
8. As indicated above, the Imputed Cooperative Value is incorrect, and the Phase 2 Tax Allocation is also incorrect and unsupportable.
9. The PAT TAX Law ignores what will happen if a tenant vacates a rented apartment, so the owner has a vacant apartment for a few months if the apartment has to be renovated. No thought is given to real-world situations.
10. It is not just the co-ops and condos who are being mistreated, but also owners of 1-3 family houses because there is no explanation as to how primary residency is calculated in a multifamily building.

Conclusion

How could the legislature and governor push through a piece of legislation that puts the owners of more than 1 million homes at risk of interest expense at a usurious rate? Have the governor and legislature already signed onto City Hall's antipathy toward the private ownership of housing? More worrisome, what is going to happen next?

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.