Key Points

• New tax on non-primary resident owners: Effective July 1, 2026, a Pied-a-Terre Tax applies to cooperative and condominium units that are not the owner’s primary residence and are not entitled to other exemptions. During Phase 1, the tax will apply to apartments valued in excess of $1 million based on the current New York City Department of Finance assessments translated into market values.
• Cooperatives face unique risks: If a co-op shareholder doesn’t pay the tax, the NYC Department of Finance can place a lien on the entire building — potentially making the cooperative a guarantor for noncompliant shareholders.
• Regulations pending: NYC Department of Finance has not yet issued regulations. We will keep boards and managing agents up to date.

New York State recently enacted the “City Surcharge on Property That Does Not Serve as a Primary Residence,” commonly known as the Pied-a-Terre Tax (PAT). While the law has been enacted, the NYC Department of Finance (DOF) has yet to issue regulations, which means some aspects of how the law will be put into practice remain unclear.

The PAT, effective July 1, 2026 but measured as of Jan. 1, will be imposed annually on “covered owners” including cooperative and condominium owners who are not NYC residents and whose apartments are valued above certain thresholds, discussed below. The PAT is a tax “surcharge” and is in addition to real estate taxes. The 2026/27 tax payment is due in full on Jan. 1, 2027.

Although we await the DOF regulations for guidance, the following appear to be exempt from PAT:

• The apartment is owned by a natural person and occupied by that person or an immediate family member (spouse, child, sibling, parent, grandparent or grandchild) as their primary residence.
• The apartment is leased for at least one year to an arm’s length lessee (a natural person) who maintains the apartment as their primary residence (the lease and occupancy must be in effect as of January 5th of the immediately preceding fiscal tax year).
• The apartment is owned in a trust and the beneficial owner of the trust occupies the apartment as their primary residence but only if the beneficial owner is the sole beneficiary.
• The property is owned by a partnership, corporation or LLC and the apartment is the primary residence of the majority owner, or in certain other circumstances.

How Will Property Values Be Calculated?

With the stated goal being to calculate PAT based on market value, the tax is being implemented in two phases. Phase 1, for tax years 2026/27 and 2027/28, is calculated based on the current DOF assessments translated into market values, which are not based on comparable unit sales. In a cooperative, this means applying the market value of the entire building to the ratio of the number of shares attributable to the apartment over the total number of shares. The market value is, itself, an interpretation of the assessment based on an equalization factor that applies to all of New York City.

Using DOF criteria, in Phase 1, apartments with a calculated market value of $1 million to $3 million will be taxed at 4%; $3 million to $5 million at 5.25%; and more than $5 million at 6.50%.

In Phase 2, beginning in tax year 2028/29, value will be calculated on future DOF criteria based on comparable sales. Apartments valued at between $5 million to $15 million are subject to a 0.80% tax; $15 million - $25 million, a 1.05% tax and over $25 million a 1.30% tax.

What Issues Does the Tax Pose to Specifically to Cooperatives?

In condominiums, each unit pays its own real estate taxes. Condominiums may face situations where the taxing authorities seek to foreclose on individual delinquent apartments (each with their own tax lot) and it won’t affect the other apartments/tax lots.

Cooperatives face bigger challenges. In cooperatives, the PAT will be charged to the entire building, which unlike condominiums, has only one tax lot. Procedurally, DOF will send its bill to the cooperative, and is to identify which apartments the PAT applies to, and the co-op will notify those shareholders. However, if a shareholder does not pay the PAT, the DOF can charge interest, and place a tax lien on the entire building. In effect, the cooperative may become a potential guarantor for its noncompliant shareholders.

There are additional complexities. To qualify as a cooperative housing corporation, Internal Revenue Code § 216 requires that there be only one class of shares and Business Corporation Law § 501(c) requires that each share shall be equal to every other share. Maintenance and assessments are charged on a per-share basis. While the Internal Revenue Code includes a carveout for taxes which, it seems, would allow the PAT to be allocated to a specific shareholder, the Business Corporation Law does not. Importantly, most proprietary leases do not provide boards with the ability to charge a shareholder on anything other than a per-share basis.

This raises several questions. Can a cooperative commence a nonpayment proceeding against a shareholder who does not pay the PAT allocated to their apartment? Will the board be required to assess all shareholders? When there is a lien on a cooperative building, shareholders’ lenders often require a letter of indemnification from the corporation. Must the corporation provide such a letter? Will a lien on the building place the cooperative in default of its underlying mortgage loan?

What Else is Unknown About the Effects on Condominiums and Cooperatives?

In addition to those discussed above, there are many unknowns.

What are cooperatives’ and condominiums’ obligations to assist an apartment owner who challenges the PAT?

How will estates be treated? For example, what happens when a primary resident apartment owner has died and the apartment is vacant? Does the answer change if a fiduciary has not yet been appointed?

How will trusts or corporate entities be treated where there are several layers of ownership?

In Summary

PAT was placed into the NYS budget. While the idea of such a tax has been discussed for years, this implementation was rushed. Above are only a few of the issues cooperatives (and, to a lesser extent, condominiums) will face.

We will continue to monitor developments as the Department of Finance issues regulations.

If you have questions about how this law may affect your building, please reach out to a member of our Cooperative & Condominium Law Practice Group.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the author(s) and not necessarily this law firm or its clients. Prior results do not guarantee a similar outcome.