The New York City Department of Finance (“DOF”) has issued proposed rules implementing the recently enacted surcharge on certain high-value New York City residential properties that are not used as a primary residence. While the proposed rules largely track the statute, they provide guidance regarding how DOF will determine primary residence status, administer the surcharge and enforce compliance.
Primary Residence Determinations
The proposed rules expand upon the statutory framework governing DOF’s determination of primary residence by identifying the records and information DOF will use in making its initial determination.
Each year, DOF will make an initial determination as to whether a covered property1 is used as a primary residence. Unless DOF possesses credible information indicating otherwise, it will treat a covered property as a primary residence if the owner’s state or federal income tax return identifies the property as the owner’s permanent home address or the owner receives the New York STAR credit for the property. In addition, DOF may rely on existing property tax exemptions commonly associated with owner-occupied residences, including STAR, senior citizen, veterans’ and certain disability-related exemptions.
If DOF cannot determine whether a property is a primary residence based on those records, it may consider other available information, including whether the owner occupied the property for a majority of the preceding calendar year and whether the owner previously identified the property as a permanent residence in documents submitted to the City. The proposed rules do not explain how DOF will determine whether an owner occupied a property for a majority of the preceding calendar year when that determination cannot be made from existing tax and property records.
Notice of Determination and Appeals
For the first year of the surcharge, DOF must notify owners of covered properties of its initial determination as to whether the property is used as a primary residence no later than August 30, 2026. Beginning with subsequent years, such primary residence determination notices must be issued by January 30. Separately, for the fiscal year beginning July 1, 2026, the assessment roll and the second semiannual property tax bill will constitute legal notice of the imposition of the surcharge. In subsequent years, notice of the surcharge will be provided through the ordinary property tax billing process.
An owner may appeal DOF’s determination by demonstrating that the covered property is not subject to the surcharge because it is used as a primary residence by the owner, an immediate family member of the owner (i.e., the owner’s spouse, child, sibling, parent, grandparent, or grandchild), or a qualifying tenant. Any appeal must be submitted in writing through DOF’s designated electronic portal within 30 days after notice of DOF’s initial determination is transmitted.
In support of an appeal, an owner relying on personal occupancy must submit documentation demonstrating that the covered property is the owner’s primary residence. Such documentation may include the owner’s most recent state or federal income tax return listing the property as the owner’s permanent home address or two or more other qualifying residency documents, such as an unexpired New York State driver’s license or non-driver identification card (or other qualifying identification), New York City voter registration records, or other documentation accepted by DOF. An owner relying on occupancy by an immediate family member must submit documentation demonstrating the family member’s qualifying relationship to the owner, including birth certificates or affidavits, and that the property is the family member’s primary residence.
In support of an appeal based on tenant occupancy, documentation establishing both the tenancy and the tenant’s primary residence is required. To demonstrate the tenant’s primary residency, documentation similar to that required for an owner seeking to establish the covered property as the owner’s primary residence must be submitted. To demonstrate the tenancy, the owner must submit an unexpired lease or sublease entered into through an arm’s length transaction, together with supporting documentation such as a utility bill issued within the past year in the tenant’s name, the tenant’s unexpired renter’s insurance policy, or proof of rental payment. Note that leases or subleases must be for a term of at least one year and must be entered into as an arm’s length transaction, meaning in good faith, for fair market rental value, and not primarily for the purpose of avoiding the surcharge.
Ownership Structures and Anti-Avoidance Provisions
The proposed rules set forth additional documentation that may be required where a covered property is held through an entity or trust. An individual claiming primary residence status through an LLC, partnership, corporation, or trust must provide documentation establishing the individual’s ownership or beneficial interest, including the entity’s governing documents and affidavits or, in the case of a trust beneficiary, the trust agreement and an affidavit from the trustee, in addition to proof of the individual’s primary residence. Additionally, the proposed rules clarify that an individual who holds a controlling interest in an LLC, partnership, or corporation that owns only a fractional interest in a covered property generally will not be treated as a covered owner for purposes of claiming the primary residence exemption. To qualify as a covered owner through an entity, the entity must hold the entire ownership interest in the property (or all cooperative shares, as applicable).
The proposed rules address potential attempts to avoid application of the surcharge through condominium subdivision. Specifically, DOF may audit situations in which a condominium property has been divided into more than three units in bad faith to avoid application of the surcharge. This provision is intended to prevent owners from using artificial condominium subdivisions to take advantage of an exclusion from the definition of a covered property that applies to certain condominium properties consisting of more than three dwelling units held by the same owner.
Audits and Penalties
The proposed rules provide additional detail regarding DOF’s authority to audit certifications and supporting documentation submitted in connection with the surcharge. DOF may conduct audits to determine the surcharge owed by a covered property, including audits of primary residence determinations and related certifications or documentation, provided that audits of primary residence certifications or documentation are conducted within six years after submission. In conducting an audit, DOF may request additional information and issue subpoenas for records or witness testimony. The rules also clarify that DOF may impose penalties where an owner submits materially inaccurate or misleading certification or documentation negligently or in bad faith, including a penalty of up to 50% of the surcharge applicable to the property for the relevant fiscal year.
Looking Ahead
The proposed rules answer several important questions left open by the legislation, particularly with respect to primary residence determinations and DOF’s enforcement authority. At the same time, questions remain regarding the application of the surcharge to certain complex ownership structures and trust arrangements.
Owners of potentially affected properties should review their residency documentation, confirm that their mailing information maintained by DOF is current and monitor the progress of the rulemaking process. We will continue to follow developments and provide updates as the proposed rules are finalized.
Our firm will continue to monitor regulatory and administrative developments and provide updates as additional guidance is issued by the Department.
Our Real Estate Practice Group is experienced in the entire range of commercial and residential real estate transactions, cooperative and condominium governance and related matters. Please feel free to contact Darren Berger, dberger@kanekessler.com at 212 519-5196 or Ari Gamss, agamss@kanekessler.com at 212 519-5135, Co-Chairs of the Real Estate Practice Group, or Seamus McDonough, smcdonough@kanekessler.com at 212 519-5183 with any questions regarding this Article or any other matter you may want to discuss.
Kane Kessler, P.C. is a full-service, general practice law firm with expertise in multiple disciplines, including Corporate, Securities and Capital Markets, Mergers and Acquisitions, Finance, Litigation, Intellectual Property, Real Estate and Trusts and Estates.
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1 The terms “covered property” and “covered owner” are used in this article as defined under the applicable statute and proposed regulations. In general terms, the surcharge applies to certain high-value residential properties that are not used as a primary residence, including one-, two-, and three-family homes, residential condominium units, and residential cooperative apartments, subject to various statutory qualifications and exclusions. For a discussion of the scope of properties and owners subject to the surcharge, see our prior article.