NYC’s tax proposal on 2nd residences
A quick note. I write these as emails, not blogs, so keep that in mind as you read, and join the Backroom to get them straight to your inbox.
Friend,
NYC has a problem, empty apartments, luxury ones to be specific. The ultra wealthy buy multi-million dollar units as vacation properties and then just, like, never go I guess (source: multiple lengthy Youtube videos I’ve watched).
432 Park Avenue in NYC, dubbed the “Pencil Tower” and maybe the crown jewel of “Billionaire’s Row” is said to be about 70% empty.
You’ll know it when you see it. It’s that building with the architectural appeal of about 40 stacked skinny lego blocks.
Owners buy into these buildings as a sound investment, to be part of an elite status-symbol-chasing club, and for some tax benefits. And naturally, they operate through shell companies to own them anonymously.
A shell company is one that is created for a limited, narrow purpose with no real business operations. Delaware and Nevada allow owners to form shell companies anonymously. The shell company can then own the real estate.
This is totally legal and not necessarily unethical. For example, if I won the lottery some day, I might buy my vacation properties via shell companies, so ya’ll wouldn’t know that I’m filthy rich. You might instead assume that I’m funding my Loewe bag and authentic mid-century furniture collections through crippling debt.
So What’s the Problem
We have already reached industrial revolution and great depression era levels of income inequality. You know that post-WW2 era of prosperity a certain political faction yearns for? That’s when we had record low levels of income inequality. Things started changing when, you guessed it, Regan came into office.
People blame the working poor, minorities, and immigrants when, shocker, it’s actually the billionaire class and our politicians who are responsible for us all feeling like brokies. The finger pointing is unfortunately a very effective political strategy.
Believe it or not, I am trying to limit my political tangent today.
Anyhow, a few people are mega rich. Everyone else is trying to survive. NYC is the densest city in the U.S. Buying a home to build wealth is becoming more of a fantasy than reality for millions. Meanwhile, valuable real estate is being used to build properties that will never be occupied and the owners are actually saving taxes in the process.
I imagine residents leaving their near minimum wage jobs to take a lengthy subway commute home and looking up on their way to see dark and empty $100 million dollar condos. It’s just kind of fucking irritating.
Enter Mayor Mamdani’s and Pied-à-Terre Tax
The law proposes a tax on non-primary residences valued over $5 million.
There’s some nuanced differences between stand-alone residences vs. condos and co-ops due to some quirks in the NYC valuation system, but the gist is pretty simple.
Here’s some examples:
You own a $10 million unit in NYC as your primary residence. You don’t owe the tax.
You supposedly live in Washington DC, but actually spend most of your time playing golf near Palm Beach, and decide to buy a little $3 million dollar brownstone in NYC. No tax. You can even guild in all the fake gold you want.
You live in Texas where you don’t have to pay state income taxes, but you buy a $20 million unit in NYC. You’d owe the tax.
Owners are exempt from the tax if they rent the unit to a NYC resident. I see so many ways to cheat this system, like renting your unit to a friend for $1 who basically isn’t going to live there, but I’m sure they will have ways to audit this.
I also thought “well why not just become a resident of NYC?”
Because we usually pay our income taxes based on our residency, and those taxes are much much higher. No one is becoming a resident of NYC to save taxes. You live there because you love it!
So What’s the Benefit
The state estimates this law could bring in $350-$500 million dollars. A quick search told me that annual bus revenue in NYC is about $600 million. Mamdani has also proposed a free bus system, so that gives context for one way this law could impact the budget and help folks.
It’s likely that the law’s ulterior goal is to encourage owners of empty properties to sell to residents, which would then bring in new real estate tax revenue and potentially new residents of the city for additional resident taxes.
The Why Behind This Email
You’re smart and can likely draw your own conclusions, but I like to just lay it all out there. So here’s my why despite none of this relating to business:
Taxes are our biggest expense. We should understand them
Tax policy shapes just about everything (healthcare, transportation, education). We should understand it, so we have the knowledge to vote
Certain media outlets and all politicians will distort reality to scare you into voting in favor of the wealthy. You should at least be informed enough to call their B.S. You do you, but act based on the facts.
Let me know if you liked this email please. There are many other laws out there I could explore in future emails.
Best,
Braden
P.S. Tax the Rich.
