In the state and local tax (SALT) industry, New York City’s recent pied-a-terre tax has dominated the news. Like many people, I had never heard the phrase “pied-a-terre” or intuitively known what it means. The French phrase essentially translates to “foot on the ground.” In this context, it refers to a weekend place, a city residence you keep when your primary life is somewhere else. Putting it into the SALT property tax context, New York City has decided to tax the non-primary residences that people may own in the city.
Since its enactment, it has been met with controversy, unanswered questions, and recent litigation. This article is intended to serve as a plain language guide to the basics of the law, where things stand, and what you and your clients should know.
What the Tax Is
New York’s pied-a-terre property surcharge passed earlier this year and took effect July 1, 2026. As its name connotes, its aim was to raise revenue by taxing New York City residential property that is not the owner’s primary residence. More specifically, the tiered tax is imposed on condominiums and co-ops valued over $1 million and one to three family homes over $5 million.
Unlike many tiered structured taxes, the rates imposed are not marginal. In other words, for a condominium valued between $3 million and $5 million, the property is taxed at a flat 5.25% annual rate. For example, if a property has a $3.5 million value, it will be taxed at $183,750 per year, on top of existing property taxes.
It is also subject to various exemptions. The common exemptions include property that is the primary residence of the owner, an immediate family member (spouse, child, sibling, parent, grandparent, etc.), or if a bona fide arm’s-length tenant under a lease of at least 12 months. From a SALT practitioner’s perspective, it is easy to see some of the obvious planning opportunities that might be undertaken to avoid this relatively hefty tax. The exemptions, however, must be properly and timely claimed, a challenge given the unusually short deadlines involved.
What Happened in Court
The rollout of the tax was anything but smooth. In fact, it was chaotic, not properly administered, and subject to litigation. Instead of undertaking its required analysis, the DOF publicly posted a database of over 900,000 properties and sent notices to approximately 17,000 property owners, many of whom live in the units full-time as their primary residence and clearly do not owe the tax.
Following the improper rollout, litigation ensued. In short order, three homeowners filed suit in O’Brien v. City of New York, arguing the tax’s rollout procedure was not adhered to. As alluded to above, the primary challenge was that DOF was supposed to avoid providing public or private notice to property determined or known to be a primary residence. By providing a public database and hundreds of thousands of notices to primary residents, DOF did not properly follow the guidelines. As such, the challengers argued the notices were defective and the database unlawfully published. Of note, the substance of the law was largely unchallenged in the case.
At the trial court level, the judge agreed and issued a temporary restraining order against the agency. Shortly after the issuance of the TRO, the appellate court reversed and allowed the rollout of the new law to continue during the pendency of the case.
Despite being reversed on appeal, the O’Brien case proved to be relatively effective. In somewhat of an acknowledgement of its procedural missteps, the City twice extended its original deadline of September 18 to October 6, giving potential taxpayers more time to file for their exemption.
As a very recent update, the New York Supreme Court ruled on the substance of the procedural challenge itself, going well beyond the earlier temporary restraining order. Justice Ozzi found the city’s rollout was arbitrary and capricious, holding that the roughly 17,000 notices sent to property owners must be cancelled and that the Department of Finance must start over and reissue individualized notices. It is a significant win for the challengers, and the city is expected to appeal, just as it did following the original TRO.
What Comes Next
While the challenges in O’Brien focused on the procedure, the bigger fight is still to come. Generally, in a property tax scenario, there is a short deadline to file for an exemption from the tax. Miss that and it becomes difficult to mount a challenge until the next tax year.
For those that have or will file the exemption, the journey to receiving the exemption has just begun. Many times, localities, like NYC, will deny many or most of the exemptions claimed. With the exemption denial comes an appeals process to the judiciary to determine the tax’s overall legality along with whether a particular property qualifies for the claimed exemptions. Given the law’s breadth and citywide impact, more litigation is all but certain.
In addition to the exemptions, there will likely also be challenges to the underlying law. States and localities have broad power to tax, subject to constitutional limitations. With respect to a law like this, many challenges are somewhat predictable and there are a few highly likely theories to invalidate the tax.
One expected approach would be that the law violates New York’s own Uniformity Clause, which requires that real property within a class be taxed at a uniform rate. Taxing non-primary residences at dramatically higher rates than primary residences within the same class creates disparate treatment of similarly situated property. There are also potential Commerce Clause (Dormant Commerce Clause) and Equal Protection challenges, given that the tax disproportionately falls on out-of-state or non-city owners who have no vote in New York City elections.
As predicted, the substance of the law has recently been challenged on constitutional grounds. Casino developer Steve Wynn and former Commerce Secretary Wilbur Ross, both Florida residents, filed suit arguing it unlawfully targets people who have no vote in New York City elections. Unlike O’Brien, their case challenges the law itself, not merely how it was administered, and puts the equal protection and commerce clause theories described above squarely in front of a court for the first time.
It is true that a number of the most effective legal challenges to new taxes of this kind do not focus on the Constitution. During the course of my career, I have successfully challenged various attempts at taxation by demonstrating that the agencies charged with implementing tax statutes exceeded their authority or misinterpreted them. These administrative law arguments are often ignored by the tax bar, yet they can be more effective and less time consuming than challenges based on the Constitution.
The Wait-and-See Trap
Many practitioners are advising their clients to take a wait-and-see approach. The idea is to let others challenge and navigate the intricacies of the new law. From there, some taxpayers can reap the benefits of a successful challenge without the associated costs of leading the charge.
This can work for many other taxes, but property taxes are different. Challenges to the underlying law and procedure face shorter windows and tighter deadlines, and exemptions are more limited. Waiting now may sacrifice the property owner’s rights to challenge it at all.
In our view, the better approach is usually to file an exemption or another challenge when in doubt. Even if you wanted others to lead the litigation, filing an appeal is an effective way to preserve your rights and get the benefits of nearly certain litigation on these cases. A constitutional win, if it ever comes, takes years and does not automatically produce refunds for taxes already paid.
The cost of inaction was permanent and immediate. The benefit of waiting was speculative and distant. If your client has already missed the deadline, the question now is how to preserve rights going forward and whether to challenge the assessment that will appear on the November bill.
What Property Owners and Their Advisers Should Do Now
- File for the Exemption and Challenge the Assessment When the Bill Arrives. The exemption deadline is right around the corner. When in doubt, file the claim for the exemption. For the underlying tax challenge, it likely makes sense to challenge the bill when it arrives within the applicable deadline. The appeal window to the bill itself or the exemption denial is relatively short, so when in doubt, act quickly to avoid a lost opportunity.
- Document Primary Residence Status for Future Years. Clients need to provide evidence of their primary residence status to qualify for the exemption in future years. The date used to determine taxable status is January 5 of each year. To qualify for the exemption next year, clients will have to show evidence that they were a primary resident of New York State as of that date. The package may reflect evidence similar to that requested in a New York State Residency Audit, which includes tax returns, utility bills, and similar documentation to show that they were primary residents of New York State.
- Evaluate the Lease Option for Future Planning. We’ve entered the planning stage, so it’s time to look at lease options. Properties that contain a genuine arm’s-length 12-month lease to an on-site tenant are fully exempt. In New York, particularly in Manhattan, properties leased to primary residents may even be profitable after accounting for the lease’s impact. It may be worth considering for clients that do not personally use the property. There may be ways to technically satisfy the 12-month rule while structuring lease transactions in a more creative way.
- Watch and Consider Joining the Constitutional Litigation. That facial challenge has now been filed by Steve Wynn and Wilbur Ross. Clients with significant annual exposure should watch this case closely and consider whether to join it or file a parallel challenge. The time to build a supporting record, including the purchase timeline, reliance on pre-enactment law, and annual tax exposure, is now. It is also important for non-residents to likely challenge their assessment to keep the appeal alive as this saga unfolds.
The Bigger Picture
This particular pied-a-terre tax isn’t a novel concept for New York. Rather, it represents a national movement to generate revenue by indirectly taxing out-of-staters. This year, Rhode Island enacted a similar tax, already nicknamed the “Taylor Swift Tax,” after Swift’s well-known compound in Watch Hill. Similar bills are being proposed in additional states, including Massachusetts.
Politicians view second-home owners, and out-of-state owners in particular, as easy targets to raise revenue, as they don’t vote in local elections and are assumed to not use their second homes enough to impact the area. Constitutional challenges in New York and Rhode Island will most likely impact other states that want to implement similar taxes.
The Bottom Line
The pied-a-terre tax is law, it is being enforced, and the constitutional fight over whether it should exist at all has not started yet. For property owners who already missed the October 6 deadline, the focus shifts to challenging the November bill and preserving rights for future years. For those who filed on time, the focus is documentation and monitoring. For everyone, the lesson is the same: in property tax practice, deadlines are hard and the window to act is shorter than it looks.
