Proposed Changes to How New York City Taxes Homeowners Positive or Negative for an Already Nervous Market?

Following on Benjamin Franklin's assertion that “nothing can be said to be certain, except death and taxes,” in New York City, homeowners are feeling a level of uncertainty, at least as to the tax part. The city government has proposed major changes in tax policy as it relates to people’s homes—their most important investment—at a time when the residential real estate market is already under downward pressure due to recent changes in the Federal Tax Code that were specifically designed to target the New York home market.

The proposed changes were conceived in an attempt to lessen a disproportionate burden on low- and moderate-income homeowners that stems from a decidedly convoluted tax system. The current assessment system determines the value of single-family homes based on the market sales of comparable properties, while co-ops and condos are valued based on a theoretical rental value based on rents of comparable rental buildings. This method of valuation, known as the income approach to value, is typically employed by appraisers when they value co-op properties for lending institutions for the purpose of providing an underlying permanent mortgage.

According to Terence Tener, CEO of KTR Real Estate Advisors, a prominent appraisal and consulting firm located in Manhattan, this appraisal methodology produces a “hypothetical” value for the co-op property. This approach, which assumes market rents for the co-op units, will generally result in a very high valuation, which may not necessarily be reflective of the real value of the property.

The Change

The proposed change to valuing properties for assessment would tax co-ops, condos, and rental buildings with fewer than ten units based upon the same criteria as one- to three-family homes, making the sales price the assessed value, and taxing on 100% of market value. Previously, the city used a system of what are known as equalization rates to level out tax burdens more fairly between different types of properties and uses.

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