Trusts, Business Entities, and Co-ops: Ownership Questions Under New York City’s New Pied-à-Terre Tax

New York City has a new tax aimed squarely at high-value second homes. New York’s new Pied-à-Terre Tax (“PAT Tax”) is imposed on residential real property owners in New York City who use such property as a secondary residence or an investment.[1]  New York’s 2026–2027 state budget bill, enacted on May 28, 2026, includes an amendment to Article 30-C of the state tax law.  Under Part HH, new Sections 1350 to 1356 introduce a “City Surcharge on Property That Does Not Serve as a Primary Residence.”  Effective for fiscal years beginning on or after July 1, 2026, the new City Surcharge on Property That Does Not Serve as a Primary Residence, imposes an annual surcharge on certain high-value residential properties that do not qualify as a primary residence. The surcharge is scheduled to remain in effect through June 30, 2031.

The policy rationale is relatively straightforward. Many of New York City’s most valuable residences are owned by individuals who live elsewhere, do not pay New York City resident income tax, but nevertheless benefit from City services, infrastructure, and a robust real estate market. The new surcharge is intended to capture revenue from those owners and is projected to raise approximately $500 million for the City of New York, annually.

The mechanics of the new law, however, are considerably less straightforward. Determining whether a property is subject to the surcharge requires more than identifying its value and whether its owner considers it a “second home.” The statute raises significant questions regarding valuation, primary residence, family occupancy, trusts, business entities, tiered ownership structures, co-ops, and even taxpayers who already qualify as New York City statutory residents.

Many of those questions remain unanswered. The New York City Department of Finance (“DOF”) has substantial rulemaking and administrative authority under the new regime, and its forthcoming guidance will be critical. Where the statute and regulations fail to provide clear answers, administrative challenges and litigation are likely to follow.

A Two-Phase Tax with Very Different Valuation Rules

The surcharge operates in two phases. During Phase One, the treatment of one-to-three-family residences (referred to as “class one” property) differs substantially from the treatment of condominiums and cooperative apartments.

For class one properties, Phase One imposes a 0.8% surcharge on properties valued from $5 million through $15 million, 1.05% on properties valued above $15 million through $25 million, and 1.3% on properties valued above $25 million.

Condos and co-ops face much higher stated rates during Phase One: 4% for values from $1 million through $3 million, 5.25% for values above $3 million through $5 million, and 6.5% for values above $5 million.

Those dramatically higher rates reflect a difference in valuation methodology rather than simply harsher treatment of condo and co-op owners. DOF currently values condos and co-ops using an income-based methodology that can produce assessed market values substantially below actual sale prices. The Legislature therefore paired that lower valuation base with higher Phase One rates.

During Phase Two, the system changes. The $5 million threshold applies across property types, and condos and co-ops move to a comparable-sales valuation methodology. The applicable rates then become 0.8%, 1.05%, and 1.3%, the same rates applicable to class one property.

Thus, a condo that sold for $10 million might have a Phase One value of only $1 million to $1.5 million, with the 4% rate applied to that lower figure. In Phase Two, the rate will decrease, but the valuation to which it applies may increase substantially.

Exactly how DOF will implement comparable-sales valuation for condos, and particularly co-ops, remains to be seen. The statute suggests the use of mass-appraisal methodologies that may consider location, size, floor, building quality, and comparable sales rather than individualized appraisals. That transition presents an obvious area for future valuation disputes.

There is another important feature of the rates: they are flat, not marginal. Once a property crosses a threshold, the new rate applies to its entire value. A property valued at exactly $25 million is subject to the 1.05% rate; a property valued at $25,000,001 falls into the 1.3% bracket.  This “cliff” makes valuation disputes near the statutory thresholds particularly consequential.

Which Properties Are and Are Not Covered?

The surcharge is directed principally at high-value second homes. Whether property is subject to the PAT Tax depends on whether the property is classified as “Covered Property.”  Covered Property includes (i) Class One: one-to-three-family townhouses, brownstones, and small houses, (ii) residential condominiums dwelling units and (iii) residential cooperative property and residential cooperative dwelling units.  

Importantly, the statute does not sweep in all valuable New York City real estate. Standard multiunit rental apartment buildings are outside the definition of covered property. Vacant land, commercial properties, hotels, certain new construction awaiting a required certificate of occupancy, unsold sponsor units, and certain condominium arrangements involving more than three dwelling units held by the same owner are also excluded. Unfortunately, for Airbnb or VRBO properties in New York City, the PAT Tax likely applies, unless the Covered Owner treats the property as their own primary residence.

Accordingly, the first question for any owner or adviser should be whether the property is within a covered statutory category at all. Only then does the analysis move to valuation and the primary-residence exemption.

The Primary-Residence Exemption: Simple in Concept, Uncertain in Application

The most important exception to the surcharge is also likely to generate the most controversy: covered property that qualifies as a primary residence is not subject to the tax.

The statute identifies occupancy “in aggregate for a majority of days during the calendar year” as the principal factor in determining primary-residence status. But that language leaves important questions unanswered. What constitutes a “day” of occupancy? Does a partial day count? How are travel, illness, temporary absences, or multiple residences treated? What records establish actual occupancy?

More significantly, the majority-of-days standard is not necessarily dispositive. Although it is the only factor expressly identified in the statute, DOF has authority to adopt additional (or potentially different) criteria by rule.

This administrative discretion is likely to become one of the most consequential aspects of the new law. Depending on how DOF exercises that authority, disputes may arise over both the substantive meaning of “primary residence” and the evidence DOF relies upon in making that determination.

DOF will make an initial determination based on information available to it. The statute does not comprehensively identify what information may be considered. Potential sources could include tax filings, utility records, voter registration, vehicle registration, and other residency-related information. An owner then has an opportunity to provide evidence supporting primary-residence treatment.

The statute expressly contemplates evidence such as a New York resident income tax return identifying the property as the owner’s permanent home, STAR exemption or credit documentation, and evidence that the property is the primary residence of a qualifying tenant or immediate family member.

For advisers, the lesson is clear: residency under the new surcharge should be treated as an evidentiary issue, not merely a statement of intent.

Family Members and Tenants May Provide a Path to Exemption

The primary-residence rules are broader than the owner’s personal use of the property.

If the covered owner is a natural person, qualifying use by an immediate family member may satisfy the exemption. “Immediate family” includes a spouse, child, sibling, parent, grandparent, or grandchild. Thus, for example, a Florida domiciliary who owns a Manhattan residence that is occupied as the primary residence of an adult child may be able to qualify for the exemption even though the owner personally uses the property only occasionally.

A qualifying lease provides another potential avenue. A property may qualify as a primary residence when it is leased to a natural person under a bona fide, arm’s-length lease of at least one year and the tenant uses the property as the tenant’s primary residence. In that context, the focus is on the tenant’s use rather than the owner’s residence.

These provisions may become important planning tools, particularly where ownership through a trust or entity otherwise complicates the exemption.

Trust Ownership May Produce Unexpected Results

Trust ownership presents some of the statute’s most significant estate-planning issues.

Under the statutory look-through rules, the beneficial owner of a trust may be treated as the covered owner when that person is the sole beneficiary. If that beneficiary is a natural person and the residence is his or her primary residence, the exemption may be available.

But consider a residence held in a trust for several family members. If no individual satisfies the statutory sole-beneficiary requirement, the look-through may fail, leaving the trust itself as the covered owner. That could make the primary-residence exemption unavailable even when one beneficiary actually resides in the property full time.

This distinction may create unintended consequences for trusts drafted long before the pied-à-terre tax existed. Trust provisions designed for estate tax planning, creditor protection, family governance, or succession purposes may now affect the availability of an entirely unrelated New York City property-tax exemption.

Practitioners should therefore resist treating a change in trust ownership as a simple tax planning solution. Any modification, decanting, distribution, or transfer intended to address the surcharge must also be evaluated under applicable fiduciary law and for its estate, gift, income tax, asset-protection, and other consequences.

LLCs and Other Business Entities Present Similar Problems

For partnerships, corporations, and LLCs, the statute generally looks to a partner, shareholder, or member holding a majority interest. If that majority owner is a natural person and the property serves as that person’s primary residence, the exemption may be available.

But what happens when no individual owns a majority?

Consider an LLC that owns a Manhattan townhouse. If one individual owns 99% of the LLC, the statute may look through the entity and treat that individual as the covered owner. If three siblings instead each own one-third, no individual holds a majority interest. The LLC itself may therefore remain the covered owner, potentially defeating the exemption even if one sibling actually lives in the property as a primary residence.

Tiered structures are even more uncertain. The statute does not clearly provide for a multi-tier look-through when, for example, the property is owned by an LLC whose majority member is another LLC or trust. Nor does it clearly answer whether an entity disregarded for other tax purposes will also be disregarded for purposes of identifying the covered owner under the surcharge.

These are not insignificant gaps. High-value real estate is frequently held through precisely these types of structures. DOF regulations may resolve some questions, but others may ultimately require administrative or judicial interpretation.

Co-ops Present Their Own Administrative Challenges

Co-op shareholders face an additional layer of complexity because the surcharge is billed at the building level.

During Phase One, the value attributable to a particular co-op unit is generally determined by multiplying the building’s overall market value by the fraction of the corporation’s shares attributable to that unit. Although DOF will perform the calculation, shareholders should verify the share fraction used because an error directly affects the surcharge attributable to the unit.

DOF then adds the aggregate surcharge attributable to nonprimary-residence units to the co-op corporation’s statement of account. The corporation must collect the applicable amounts from affected shareholders.

Co-op boards therefore become important participants in administration of the new tax and should consider procedures for reviewing notices, confirming share allocations, communicating with shareholders, and addressing disputed assessments.

Statutory Residents Present Another Unresolved Issue

One particularly difficult issue involves individuals domiciled outside New York City who nevertheless qualify as New York City statutory residents because they maintain a permanent place of abode in the City and spend more than 183 days there.

Such individuals may already be subject to New York City resident income tax. Yet because their domicile, and therefore their permanent home, remains elsewhere, the City residence may not qualify as their primary residence under the new surcharge rules.

The result could be anomalous: an individual could potentially pay New York City resident income tax while simultaneously being subject to a surcharge premised on the New York property not being a primary residence. The statute does not clearly resolve this tension. DOF guidance (or litigation) may ultimately be necessary.

Expect Administrative Challenges and Litigation

The uncertainty surrounding the primary-residence standard, entity look-through provisions, valuation methodology, and statutory residents makes disputes inevitable.

An owner who disagrees with DOF’s market-value determination may seek correction through the New York City Tax Commission on the ground that the valuation is excessive or unlawful or that the property qualifies as a primary residence. Importantly, a Tax Commission proceeding is a prerequisite to judicial review. The statute’s administrative remedies are the exclusive means of challenging surcharge liability.

Primary-residence determinations also carry meaningful audit exposure. DOF may audit certifications and supporting documentation for up to six years after submission, and the Commissioner has authority to subpoena witnesses and require production of relevant records.

Owners claiming an exemption should therefore maintain contemporaneous documentation supporting occupancy and residency for at least six years.

More Questions to Come

The first surcharge payment for fiscal year 2026–2027 is generally due January 1, 2027. But several significant issues remain unresolved.

Among them: How will DOF count days for purposes of primary residence? How will it treat temporary absences? Will statutory residents receive any accommodation? How far will the entity look-through rules extend? Will disregarded entities be disregarded for surcharge purposes? How will comparable-sales valuation work for co-ops? And what happens when a covered property is sold during the fiscal year?

The last question has immediate transactional significance. The statute does not expressly address midyear sales, although DOF has authority to issue rules. Until that happens, purchasers of high-value New York City residences should conduct diligence regarding outstanding surcharge exposure, and purchase agreements should address allocation of any liability between buyer and seller.

For the first fiscal year, the relevant Phase One market value is determined as of January 5, 2026. Primary-residence determinations and supporting documentation also reach back to periods preceding the July 1 effective date, including the owner’s 2025 New York income tax return and applicable STAR records.

What Owners and Advisers Should Be Doing Now

The pied-à-terre surcharge should not be viewed merely as another real property tax calculation. For affected owners, it requires a coordinated review of valuation, actual use, residency, ownership structure, and documentation.

Owners of high-value New York City residential property, and the attorneys, accountants, fiduciaries, family offices, and other professionals advising them, should determine whether the property falls within the statute, review its current DOF valuation, assess whether the primary-residence exemption is available, and examine whether a trust or entity ownership structure affects that analysis.

Particular attention should be given to trusts with multiple beneficiaries, entities without a majority natural-person owner, and tiered structures. Existing arrangements may have been entirely appropriate when established yet produce unintended results under a tax regime that did not exist when those structures were created.

At the same time, restructuring should not be undertaken solely to avoid the surcharge without considering the broader legal and tax consequences.

The statute provides the framework, but DOF regulations and administrative practice will determine much of how the pied-à-terre tax operates in the real world. Given the unresolved statutory questions, and the substantial amounts at stake for high-value New York City properties, administrative challenges and litigation over valuation, residency, ownership, and the scope of the exemption are likely.

For property owners and their advisers, the prudent approach is to assess exposure now, preserve documentation, review existing ownership structures, and closely monitor forthcoming DOF guidance.

[1] See N.Y. Tax Law § 1350.