What do you need to know about Pieds-à-terre?
Now that we’ve covered the definition of a pied-à-terre you might simply be thinking that it’s just another fancy marketing term used by realtors to help sell homes, but in truth, there are far-reaching implications to consider when purchasing a pied-à-terre. Here’s what you need to know:
Condo vs. Co-op- Pieds-à-terre come in all shapes and sizes, from glitzy and luxurious getaway homes with 5-star amenities to small no-frills apartments. Pied-à-terre can technically refer to any property be it a condo, co-op or even townhouse, but oftentimes co-op buildings will prohibit pied-à-terre use. Some buildings may not strictly prevent pied-à-terre usage but may impose restrictions that make it difficult to rent out or sublease your apartment. Examples include restrictions on leases and subleases for 1-2 years after purchasing as well as restrictions on occupancy over a certain period of time (for example you may only be able to rent your apartment out for two years in any 5 year period). Keep in mind that there is no legal definition for what constitutes a pied-à-terre so the matter is often left up to the interpretation of condo and co-op boards.
Financing: It’s important to know that obtaining favorable financing for a pied-à-terre isn’t always as straightforward as you may think. To start, interest rates for second homes are typically higher than for primary residences. Furthermore, to qualify for a conforming loan for a non-primary residence or second home your pied-à-terre will typically need to be at least 60 miles away from your primary residence. If that's not the case lenders will consider it an investment property and rates will be even higher.
Taxes: Owning or investing in a pied-à-terre has various tax implications (yes, you can take a mortgage tax deduction on a pied-à-terre), many of which you can read about on the IRS website, but in recent years New York City’s pieds-à-terre have been in the news as local politicians, and government officials have proposed various new taxes on them. The idea behind the so-called pied-à-terre tax is that wealthy buyers, particularly foreign investors, are purchasing pieds-à-terre and leaving them unoccupied for most of the year costing the city hundreds of millions in tax revenues (as these buyers do not pay NYC income tax). While it is highly unlikely that any such proposals pass (especially considering the potential legal implications*) any new pied-à-terre tax would be far-reaching and would likely adversely affect the luxury real estate market.
*A tax on non-primary residents could be construed as being discriminatory as well as being unconstitutional under the Commerce Clause.