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NYC’s Lopsided Tax Structure and the Fight to Fix It + Condo Listings with Low Taxes
By Cait Etherington
Friday, November 17, 2023
New York City’s residential tax system is widely considered to be unfair, illogical, and urgently in need of repair. In 2022, Brad Lander, the city’s own comptroller, issued a statement acknowledging at least three notable problems with the current system:
1. The rules for valuation differ for 1-3 family homes, co-ops, and condos. Large rentals are taxed at nearly double the rate of condos and co-ops.
2 The system is generally opaque and challenging to comprehend. Variation in assessment ratios based on property type confuses owners and reduces transparency in the system.
3 There is a significant disparity in effective tax rates across neighborhoods. Homeowners in the outer boroughs pay considerably higher rates compared to those in upper- and middle-class Manhattan and brownstone Brooklyn.
Despite the system’s widely acknowledged problems, it has been allowed to persist for decades. Much like the MTA, mayor after mayor has also promised to fix the system and left office with it still chugging along to the detriment of many New Yorkers.
The Problem with NYC’s Residential Tax System
Two interconnected practices are frequently pointed out as the primary causes of the ongoing unfair treatment of certain property owners and preferential treatment of others in New York City's residential tax system.
Firstly, for decades, city officials have manipulated the taxable value of condos by adjusting their capitalization rate. In essence, the capitalization rate or "cap rate" represents the expected net income the property would generate if rented out (calculated by dividing the net operating income by the property value). Generally, higher cap rates signal higher-risk investments for investors, resulting in lower valuations.
As revealed in a 2021 Bloomberg investigation, in New York City, assessors frequently double the capitalization rates of condos and, in turn, artificially drive down the value upon which these units are assessed for tax purposes. But there are other problems. The Bloomberg investigation also observed, “In modest neighborhoods, those values are set somewhat closer to actual sale prices; in upscale areas, they’re much farther below the market. In other words, big-dollar properties get a bigger break.” In essence, the effective tax rate on higher-valued properties is often less than half that of lower-valued properties (learn more about the surprisingly low tax rates on some of the city’s highest-valued units here).
Still, the inflation of cap rates and uneven application of these rates across neighborhoods and property types is one of many reasons New York City’s Residential tax system is widely acknowledged to be broken.
How Residential Taxes Are Determined in NYC
One distinctive aspect of New York City's approach to tax assessments is the treatment of condos and co-ops, even those that have never been rented out due to building subletting rules. State law mandates that assessors value all co-op buildings and condos with more than three units as if they were income-producing properties, regardless if the units are allowed to be rented out.
The standard industry practice for valuing income-producing properties involves dividing the net operating income (NOI) by the capitalization rate. However, city assessors consistently raise the capitalization rate on condos, adding complexity to the process. Moreover, city officials don't rely on widely available market data; instead, they determine market values based on a limited selection of apparently comparable rental buildings in similar neighborhoods.
The issues with this approach, as highlighted by the Bloomberg investigation, include the relatively small sample size and the unclear method of comparison. Consequently, a walk-up in Chinatown with affordable units might be compared to a building in nearby Soho or Tribeca, leading to inequitable outcomes where the owner of the higher-valued property benefits, and the owner of the lower-valued property loses out.
The issues with this approach, as highlighted by the Bloomberg investigation, include the relatively small sample size and the unclear method of comparison. Consequently, a walk-up in Chinatown with affordable units might be compared to a building in nearby Soho or Tribeca, leading to inequitable outcomes where the owner of the higher-valued property benefits, and the owner of the lower-valued property loses out.
Despite all residential buildings being treated as rentable when setting tax rates, only a portion of the assessed buildings are rentals, which historically disadvantages most renters. On average, condo owners enjoy a significantly lower effective tax rate than rental building owners. Higher taxes on rental buildings contribute to a higher cost of living for a city predominantly composed of renters.
The Proposed Fix
Recommendations abound on how to fix the current residential tax system. Among the most popular proposals is to scrap the strange practice of valuing all properties based on their potential revenue generation as rentals. It also goes without saying that given that the market value of properties is now widely available in publicly accessible databases, many critics continue to call for the city to abandon its opaque approach to valuating properties for tax purposes, which is based on only a small and random sample of properties.
New York City Comptroller Brad Lander also has several recommendations
for reforming the current system, including the following:
• Aggregate Class 1, Class 2 condos and coops, and small rentals (up to 10 units) in one class, and uniformly value all properties in the class at sales-based market value.
• End fractional assessments and apply one tax rate to the sales-based market value.
• Phase the changes in over five years, with the potential consideration of allowing homeowners to defer the higher tax burden until the sale of the property, or even waiting until the sale to reset the rates.
• Provide a homestead exemption for homeowners who use their property as a primary residence and circuit breakers to protect potentially vulnerable homeowners in areas where rates may rise over time.
Challenging an NYC Tax Assessment
While the debate about tax assessments continues, property owners in New York City do have one recourse. If they think their property has been unfairly assessed, they can dispute their tax assessment by following the instructions provided on the Department of Finance site. Notably, there are two deadlines each year. For properties containing three or fewer units, the deadline is March 15. The deadline to dispute residential taxes on all other properties is March 1.
Available Condos with Low Taxes
For those seeking to capitalize on the city's imbalanced tax system for condos and concurrently benefit from abatement programs, explore the list below featuring low-tax condos with ongoing tax abatements. It's important to note that the abatements mentioned have a limited duration, with tax rates gradually increasing over time. The abatement usually extends to the entire building, so be sure to explore other available units within the property. Contact us for a full list of listings with ongoing tax abatements at info@cityrealty.com or (212) 755-5544.
1400 on Fifth, #6F
$1,149,000
No Current Taxes | 421-A Tax Abatement remains valid until 2031
Harlem | Condominium | 3 Bedrooms, 2 Baths | 1,216 ft2
1400 on Fifth, #6F (Douglas Elliman Real Estate)
Gateway Tower, #2I
$575,000
Monthly Tax: $9 | 421-A abatement until 2032
Harlem | Condominium | 1 Bedroom, 1 Bath | 646 ft2
Gateway Tower, #2I (Compass)
405 Quincy Street, #2B
$715,000
Monthly Tax: $10 | 421-A abatement until 2033
Bedford-Stuyvesant | Condominium | 1 Bedroom, 1 Bath | 626 ft2
405 Quincy Street, #2B (Compass)
Sofo Tower, #1A
$775,000
Monthly Tax: $23 | 421-A Tax Abatement Eligible
Astoria/LIC | Condominium | 1 Bedroom, 1 Bath
Sofo Tower, #1A (Corcoran Group)
The Langston, #7C
$939,000
Monthly Tax: $13 | Tax Abatement in place through 2032
Harlem | Condominium | 3 Bedrooms, 2 Baths | 1,085 ft2
The Langston, #7C (Compass)
Brooklyn Point, #19C
$1,215,000
No Current Taxes | 25-Year 421-A Tax Abatement
Downtown Brooklyn | Condominium | 1 Bedroom, 1 Bath | 751 ft2
Brooklyn Point, #19C (Serhant LLC)
One Manhattan Square, #40J
$1,375,000
Monthly Tax: $1 | 20-Year Tax Abatement
Lower East Side | Condominium | 1 Bedroom, 1 Bath | 695 ft2
One Manhattan Square, #40J (Nest Seekers LLC)
The Edge North Tower, #6P
$1,335,000 (-2.9%)
Monthly Tax: $9 | 421-A abatement until 2036
Williamsburg | Condominium | 1 Bedroom, 1 Bath | 721 ft2
The Edge North Tower, #6P (Corcoran Group)
Bridgeview, #405
$840,000
Monthly Tax: $15 | Tax Abatement in place through 2033
Williamsburg | Condominium | 1 Bedroom, 1 Bath | 688 ft2
Bridgeview, #405 (Keller Williams NYC)
550 Vanderbilt, #807
$998,000
Monthly Tax: $23 | 421-A Tax Abatement until 2043
Prospect Heights | Condominium | 1 Bedroom, 1 Bath | 646 ft2
550 Vanderbilt, #807 (Sothebys International Realty)
Hello Madison, #404
$1,895,000
Monthly Tax: $40 | 421-A Tax Abatement until 2033
Prospect Heights | Condominium | 2 Bedrooms, 3 Baths | 1,350 ft2
Hello Madison, #404 (Coldwell Banker Warburg)
On Prospect Park, #9F
$2,995,000
Monthly Tax: $24 | 421-A Tax Abatement until 2035
Prospect Heights | Condominium | 3 Bedrooms, 2 Baths | 1,946 ft2
On Prospect Park, #9F (Compass)
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Contributing Writer
Cait Etherington
Cait Etherington has over twenty years of experience working as a journalist and communications consultant. Her articles and reviews have been published in newspapers and magazines across the United States and internationally. An experienced financial writer, Cait is committed to exposing the human side of stories about contemporary business, banking and workplace relations. She also enjoys writing about trends, lifestyles and real estate in New York City where she lives with her family in a cozy apartment on the twentieth floor of a Manhattan high rise.
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