A look at the Byzantine NYC Property Tax System

The PropertyClub Team
Dec 5th 2019
It’s no secret that people who purchase property are often concerned with the and amount of property tax payments they will have to make, and NYC owners are no exception. We're taking a look at how rates are assessed and why some uber-luxury condos and co-ops receive tax bills that seem far too low.

NYC property taxes are among the highest in the country, specifically as it pertains to apartments buildings and commercial buildings. Although the revenue from property taxes is vital to the city’s core operations, there is a lot of controversy and pushback regarding the perceived unfairness of the current New York City property tax system. 

Property taxes are a significant source of income for all levels of government in New York State and City. According to the Department of Finance, property tax revenue represented 45% of all the city tax dollars collected in the fiscal year 2019 (fiscal year ended on June 30, 2019). Fortunately, property taxes are deductible from an owner’s personal income taxes or business taxes, if applicable. In New York City, property taxes are primarily used to pay for a long list of services that the city provides. These services include but are not limited to improvements of roads, tolls, and bridges, schools and education costs, parks, water, and sewage facilities for a municipality, the local police and Fire Department, employee salaries, etc. 

What types of property tax breaks and exemptions are there in NYC?

Generally speaking, all government-owned property is immune from property taxes. This immunity includes property owned at all levels of government (federal, state, and local government) and includes facilities such as schools, colleges, universities, museums, and parks, etc. Additionally, properties owned by not-for-profit and religious organizations are typically exempt from property taxes. This includes churches, synagogues, temples, hospitals, schools, and convents. 

Homestead exemptions, elderly, disabled, and veterans’ exemptions, various tax abatements, are available in New York City, which gives eligible recipients complete property tax exemptions or partial reductions. One significant tax break which has been fueling the development of luxurious condominium developments throughout NYC is called the 421-a exemption program

The original 421-a tax abatement program started in 1971. It was implemented to encourage developers to develop unused and underutilized land by offering them reduced property taxes for a set period of time, generally between 10 and 25 years. Typically, the tax break goes with the property, as long as the project continues to qualify. in April 2017, the New York legislature enacted a new version of 421-a tax law, which is known as the “Affordable Housing NY Program.” Overall, the new bill primarily focuses on providing similar tax incentives to developers who agree to offer both affordable housing units and to pay higher wages to their construction workers. Over the years, this evolving tax abatement has birthed thousands of Manhattan condominium projects as well as created thousands of affordable housing units. 

Information and requirements for various NYC property tax breaks and exemptions can be found on the NYC Department of Finance website. 

How are New York City property taxes calculated?

The Assessed Value for property taxes is the value placed on a piece of property by the government (I.e., New York City Department of Finance). The assessed value of a property is used to calculate property taxes and in proportion to the property value. 

Nationally, property taxes are supposed to be ad valorem taxes, which means that they are paid according to the value tied to the property. However, as it pertains to the New York City property taxes, the calculations are disproportionately unfair. Specifically, the problem in New York city boils down to the fact that there is a variable in a property tax calculation in assessing the value of the properties throughout the five boroughs. Mainly, New York City overestimates the market value of properties located in poor neighborhoods. Consequently, the assessed value of a property is inflated, which results in a higher final tax bill.

Admittedly, designing a fair system in New York City is challenging because there are approximately three million unique homes throughout the five boroughs. Yet, the problem must be fixed because the current property tax system is extremely outdated and unfair.

For homeowners in slower markets throughout the city, the constant rising of property taxes is an economic burden. Further, the exceptionally high tax rate for commercial properties ends up hurting job providers and job prospects in the city. However, for real estate investors and developers who own rental and commercial property (that are not rent-regulated) when property tax rates increase, this cost is typically passed on to renters through higher rents and fees. Essentially taxing apartments more substantial than private homes, condos, and coops end up hurting the poorest residents of New York City, who are mainly renters. One would think with the recent passing of the “Housing Stability and Tenant Protection Act of 2019” (TPA), the legislature would look to property taxes as another way to keep rent affordable throughout New York City.  

How did New York City’s property tax system become unfair?

In short, in 1981, the new legislation removed the former “full value” language from the property tax law. It then established the current system in New York City, which separates properties into four different categories. Each class of property is taxed on a different portion of its full market value. Class 1 is comprised of one to three-family homes. Class 2 includes all apartment buildings, co-ops, and condos. Class 3 comprises of utilities. Class 4 consists of commercial properties. 

New York City Property Tax Rates for Tax Year 2019/2020 are as follows: 

  • Class 1 - 21.167% 
  • Class 2 - 12.473%
  • Class 3 - 12.536%
  • Class 4 - 10.537%

The first issue of the New York City property tax system involves the valuing of condominiums and cooperative apartments. According to the NYC Dept of Finance, the value of condominiums and cooperatives is calculated in the following manner: 

The Department of Finance (DOF) is required by NY State law to value condominiums or cooperatives as if they were residential rental apartment buildings. The DOF uses income information from rental properties with similar physical features and locations to the condominiums or cooperatives. The DOF then applies this income data to the condominium or cooperative and determine its value in the same way DOF values rental apartment buildings. Update Schedule: Annually

Based on the preceding, New York City values condos and coops based on the income of rental properties with similar characteristics. Using this system, the city’s valuation method ends up undervaluing New York City’s luxurious developments because there are no rental buildings to compare it to. This happens because the age and location of many co-op buildings are compared to rent-regulated buildings. In turn, this results in a vast discrepancy in the assessed value of co-ops apartments (you can view real rental comps used on the Department of Finance website here: condo/coop comparables).

For example, according to the Wall Street Journal, the most expensive home sold in United States history is a Midtown Manhattan condo that was sold for $238 million earlier this year to Hedge fund billionaire Ken Griffin. According to the Wall Street Journal, Griffin paid taxes on a property valuation of just $9.4 million, which is only .22 percent of the sales price.  

Another inequality in the NYC tax system has been the caps on how much the assessed value of a home can increase. Mostly, tax assessments have not reflected actual market values, especially in more impoverished neighborhoods. The Tax Equity Now New York, a coalition of homeowners, renters, and business groups, filed a lawsuit in 2017 challenging the state laws that lead to a disproportionate rent burden between neighborhoods. The group claims the areas with the highest tax charges are less affluent and more likely to be the home of large populations of people of color.

Interestingly, the New York state constitution currently limits New York City’s property taxes to 2.5 percent of the “full value” of the property tax base. However, the various tax loopholes and the current system, which divides properties into four classes, essentially cancels out his provision. 

Lastly, the New York State constitution removes the limit of property tax if the city needs revenue to pay back its debt. Essentially, the city can raise taxes at any time; it needs money for whatever reason, including its own lousy budgeting efforts. 

The various tax abatements, rebates, and caps in the current New York City property system, further complicate the tax system. The end result is that homeowners slower markets such as the Bronx experience high taxes compared to the market values taxes rise because of caps that keep tax hikes low when the housing market unexpectedly leaps.

Finding a solution to the New York City Property Tax Inequality 

Even though virtually every interest group and political party has called for, at one point or another, an overhaul of the current tax scheme, several attempts have failed. 

After years of intense criticism that New York City’s property tax system was patently unfair, in May 2018, Mayor Bill de Blasio, together with City Council Speaker Corey Johnson, announced they would implement a commission of experts to explore the issue of New York City property tax inequality. 

The goal of the Advisory Commission on Property Tax Reform is to overhaul and simplify the archaic tax system without compromising the city’s revenue received via property taxes, which is New York City’s most significant revenue stream. (Approximately $27 billion last fiscal year.) In other words, the commission’s goal is to make the tax system “Fair” while maintaining profitability.  

The committee must assess the way different properties are classified and evaluated by the state, how statutory restrictions on tax rate growth interact with market forces, and how the city sets the tax rate. These factors have had consequences for communities of color, low-income New Yorkers, seniors, and residents in some, but not all, boroughs.

In any event, more than a year later, after the commission was implemented, there have been various panels and meetings but still no recommendations or reports from the commission on the steps needed to overhaul New York City’s property tax system.

New York City has everything to gain and almost nothing to lose by revamping its entire property tax system. Interestingly, there is compelling evidence that reforming the tax system and fixing the various inequalities would generate additional tax revenue for the city. In other words, the city is leaving money on the table by refusing to tax luxurious homes in proportionate to its market value. By some estimates, the city underestimates the value of all residential property by as much as 50%. Lastly, the overhaul in the tax system would have a direct effect on the poor neighborhoods and owners and remove most if not all of the tax inequality throughout the five boroughs. No other city in the nation has a property tax system as byzantine and inequitable as New York City; as such, change is overdue.