“If we can find a bunch of billionaires around the world to move here, that would be a godsend,” opined Michael Bloomberg during his tenure as mayor of New York City. “Because that’s where the revenue comes to take care of everybody else.” His dream was that the taxes they paid would provide such an infusion of cash to the municipality that the rising tide would lift all boats and the money could be reinvested into helping those struggling to make ends meet.
It seems that his dream has indeed come true. Higher and higher condo towers are going up each year, with views that are affordable only for the super-wealthy. But there’s a catch in the former mayor’s ideal: tax codes in New York City make it possible for those buying and selling $100 million dollar abodes in the sky to pay next to nothing in property taxes. Here’s how billionaire homeowners in the Big Apple manage to avoid paying property taxes:
It’s All in the Assessment
Part of the reason the billionaires Bloomberg dreamed of attracting aren’t paying the taxes he dreamed would come with them has to do with the way property taxes are assessed in the city. The new, gleaming, glass-covered residential skyscrapers are being assessed at just a fraction of their market value, and buyers are paying only a tiny slice of that fraction in property taxes.
Taxes Based on Location
Property taxes in the city are not based on the sale prices of the units, as happens in most states. Instead, property taxes vary widely depending on a given building’s location within the city. This method of calculating property tax were put into effect over many years in an effort to avoid burdening homeowners with huge property tax bills.
But that plan didn’t take into consideration the effects of gentrification and what happens when property in neighborhoods appreciates in value rapidly. The result is that people who buy property in certain areas of the city pay far less in property taxes than an owner in a different area, where property prices are more stable. Some areas have seen their property values rise so quickly that the only people who can afford to buy are the wealthiest New Yorkers, who will paradoxically pay very little in property taxes.
New York City offers a tax break to new development as an incentive to builders, called the 421-a exemption. The goal was to make new construction more affordable and thus more attractive, creating jobs and bringing in revenue. But the result has been towering residential skyscrapers full of condos going for $90 to $100 million to buyers who will pay just .001 of the average property tax rate.
For example, one penthouse on the 89th and 90th floors in the ultra-sleek One57 building went for more than $100 million. The new owners paid just $17,000 in property taxes, which comes to .017 percent, almost one-hundredth of the tax rate paid nationally by homeowners. This unit isn’t an exception, either, but rather the new norm. According to real estate experts, the owner of the penthouse mentioned is actually being assessed as if the condo cost in the range of $3 to $6 million. But someone is paying those taxes, and in New York, it’s often renters–not-homeowners–who are footing the bill.
This is a odd setup for a city that relies on property taxes for most of its revenue. It’s also a problematic one. The result of the way the current tax code is written is that renters in apartment buildings end up paying, indirectly, most of the property taxes that the wealthy condo owners aren’t paying, shifting the tax burden from those who can most afford to pay to those who often can’t. In effect, low-income renters in the city are subsidizing housing costs for the wealthy.
Property Tax Burden Shifted onto Renters
Someone has to pay the property taxes. Gradually, that “someone” has become the renter. This is because large apartment buildings and the majority of co-ops are considered Class 2 property for tax purposes. All are taxed as apartment buildings that generate income according to a complicated and outmoded formula based on a state law last revised in 1981. The result is the burden of paying property taxes has slowly shifted from people who own property to people who rent; essentially from the rich, to the poor.
Not paying property taxes at the same rate as their lower-income renting counterparts isn’t the only way the wealthy homeowners are benefitting from the new status quo. There is even a proposal in the City Council to create a rebate of $250 on homeowners’ property taxes each year. The idea is to make homeownership affordable for everyone, but the proposal would cost non-homeowners $95 million. Even now, homeowners in the city pay substantially less in property taxes than homeowners in nearby locations like Westchester and Long Island. If this rebate goes into effect, it would shift more of the property tax burden to renters who don’t have the money to buy their own home, exaggerating an already glaring inequity.
The property tax laws in New York City are complicated and outdated. The result is that the rich, who can afford to buy homes in newly prominent neighborhoods, are paying less property tax than people who earn less and don’t own property at all; effectively those that can afford homes are being subsidized by those that cannot. This situation is complicated, but it is pretty clear is that NYC property tax reform is needed. This is not about “shifting the burden” to the rich, but simply everyone paying their fair share. Property taxes should be paid by those who own property, not those who do not.