Although taxes are not the most interesting subject, nor are they likely to bring much happiness to anyone having to pay them, they are a necessary part of the government. New York City residents know all too well how expensive property tax bills can be. About 45% of all NY City tax dollars collected each year come from real estate taxes. So how does the government go about calculating residential property tax bills? And is there any way to have property taxes lowered? For more information, speak with an experienced NYC real estate lawyer.
Properties in New York City are split into four classes. Class 1 includes one to three-unit residential properties. Class 2 includes residential properties with more than 3 units, including cooperatives and condominiums. And Class 3 includes utility company equipment and special franchise property. Finally, Class 4 includes all other real property, such as office buildings, factories, stores, hotels, and lofts.
In this post, I’ll concentrate on Class 1 properties. The first step the government takes in calculating Class 1 residential property tax bills is determining the market value of your residence. The government determines the market value by using statistical analysis that incorporates data such as recent selling prices of similar properties in your neighborhood. Similar properties are classified as those that are close in size, style, and age to your property.
The second step is determining a property’s assessed value. A property’s assessed value is a percentage of its market value. The good news is that the state law limits the increase of the assessed value of a Class 1 property in New York City. For a Class 1 property, the assessed value cannot rise more than 6% in one year or 20% over five years, no matter how quickly the market value of your home increases. This is true unless you make a physical change to the property, such as an addition or renovation. Because of the caps, it is possible that the assessed value of your property continues to increase even if your market value decreases. This is because it can take years for the assessed value to “catch up” to the market value.
Assessed value can change for many reasons, including but not limited to (1) your property’s market value changing; (2) making physical changes to your home, such as additions or renovations. These physical changes are not subject to the annual or five-year caps on increases to your assessed value for that year; (3) You lost a tax exemption or abatement, or its value was reduced; (4) your assessed value is catching up to prior changes in market value.
The third step is applying exemptions that are on file. Exemptions reduce your assessed value before your taxes are calculated. The City of New York offers exemptions to seniors, veterans, clergy members, people with disabilities, and other homeowners. If you are granted an exemption, the amount of the exemption is subtracted from the assessed value of your home. This reduces your taxable value.
One common exemption in NYC is School Tax Relief (STAR), which is available to owners of houses, co-ops, and condos with less than $500k annual adjusted gross income. Typically this exemption earns you tax savings of approximately $300 per year.
By subtracting any exemptions from the assessed value of your property, you will get your taxable value. This leads to step 4, the final step the government takes to calculate Class 1 residential property tax bills, which is applying the city’s tax rate for Class 1 properties to taxable value, and then subtracting any applicable abatements. The city’s tax rate percentage for Class 1 properties is set annually by the city council based partially on state law requirements.
However, you can still get a discount on your final tax bill if you qualify for certain tax abatements. Abatements reduce your taxes after they’ve already been calculated. This means that once the tax rate percentage is applied to the taxable value of your property, abatements can further reduce the bottom line. Standard abatements provided by the government include:
- cooperative and condominium abatement,
- green roof abatement,
- major capital improvement (MCI) abatement, and
- solar roof abatement.
Every January the Department of Finance will send a Notice of Property Value (NOPV) to homeowners explaining the determination of their property’s market and assessed values, and listing applicable exemptions. If you feel that the assessed value on your property is too high, you have the right to appeal to the New York City Tax Commission. To have the Tax Commission lower your assessment, you must prove that your property’s value is less than its effective market value (assessed value before exemptions divided by 6%).
|Property Classes in New York City||Description||Examples|
|Class 1||One to three-unit residential properties||Single-family homes, duplexes, triplexes|
|Class 2||Residential properties with more than 3 units, including cooperatives and condominiums||Apartment buildings, co-op buildings, condo complexes|
|Class 3||Utility company equipment and special franchise property||Utility infrastructure, special franchise properties|
|Class 4||All other real property, such as office buildings, factories, stores, hotels, and lofts||Commercial buildings, warehouses, hotels, retail stores|
New York Property Tax: Constitutional Standards
The New York State Constitution limits the ability of municipalities, counties, or cities to levy property taxes. The Comptroller must withhold certain local aid payments from municipalities whose taxes exceed the municipality’s tax cap under statutes that were enacted to implement these constitutional standards.
Real property taxes in New York State are the largest source of revenue for municipal governments. Property taxes are used to offset the gap between the appropriations and the expected non-property tax receipts under the traditional budget procedure.
The maximum amount of real property tax that can be collected in each fiscal year is called the Constitutional tax limit. This is done by multiplying the taxable value of the real estate by the percentage outlined in the Constitution. The hardest part of the process is determining whether the tax levy required by a yearly budget stays within the limit.
The Constitutional tax limit should not be confused with the Tax Cap. Tax Cap is another tax levy regulation. The Tax Cap was enacted in 2011 by the State legislature and requires all local governments and school districts, except New York City and the “Big Five” dependent school districts to file separately.
In the current fiscal environment, rising municipal budgets and falling non-property income streams create the need to increase property taxes. This will allow for a larger share of the Constitutional Tax Cap. The tax cap will also fall if overall property values drop.
Property taxes in New York City can be painful, both to your bank account and to understand. Although taxes are certain, if we arm ourselves with knowledge we can make them a little less painful.
New York City Real Estate Taxes
Understanding the various taxes involved is crucial when it comes to buying or selling real estate properties in New York City. In addition to the NYC transfer taxes imposed on property sales, there are also statewide transfer taxes and flip taxes, each with its own set of rules and rates. Familiarizing oneself with these taxes can help individuals navigate the complexities of the real estate market.
New York City Transfer Tax
In New York City, the Real Property Transfer Tax (RPTT) is imposed on real estate transactions where 50 percent or more of the ownership is transferred and the transfer value exceeds a specific threshold. However, certain exemptions exist, such as for the United States Government and its agencies. Inherited properties are also exempt from the NYC transfer tax but must still be reported on RPTT returns. If an inherited property is later sold, all transfer taxes are applicable.
The amount of transfer tax varies depending on the property type and value. Residential property transfers, including one- to three-family homes, co-ops, and condos, are subject to a tax rate based on a percentage of the sale price, determined by the property’s value. Different tax rates are applied to transfers of other property types, such as multi-unit dwellings.
New York State Transfer Tax
In addition to the local transfer tax, sellers in New York City are also subject to a statewide tax imposed by the New York State Department of Taxation and Finance. The tax rate is calculated based on the sale price. Properties sold for $1 million or more may be subject to an additional tax. Since July 2019, new tax rules and additional transfer taxes are applicable to New York City properties valued at over $2 million, which are paid by the seller.
It’s important to note that these transfer taxes are distinct from the mansion tax, which is typically paid by the buyer. The mansion tax has progressive tiers based on the purchase price of the home.
When selling a property in New York City, there may be additional taxes known as “flip taxes.” These taxes primarily apply to co-ops and are intended to discourage frequent property flipping, which can impact a building’s culture or demographics.
The calculation of flip taxes can vary and may be based on a percentage of the gross sale price, a fixed dollar amount per co-op share owned, a flat fee, or a combination of these, depending on the co-op’s policy.
Getting the Help of a Skilled New York City Real Estate Lawyer
Property owners in New York City need a clear understanding of how property taxes are determined in order to make informed decisions and minimize their tax liabilities. The intricate tax system takes into account factors such as property assessments, tax rates, exemptions, and abatements. However, due to the complexity and constant changes in regulations, navigating this landscape can be challenging.
This is where a New York City real estate lawyer plays a crucial role. A skilled attorney can review property valuations, identify errors or discrepancies, and challenge unfair assessments on behalf of their clients. At Avenue Law Firm, our NYC real estate lawyers may be able to help property owners explore various tax reduction strategies by identifying eligible exemptions, abatements, or other relief programs. In the event of a property tax dispute, our team may be able to provide representation and guidance, including negotiating with tax authorities, filing appeals, and representing clients in administrative or judicial proceedings. Contact us today at (212) 729-4090 to schedule a consultation.
Written by Petro Avenue, Esq
Real Estate Attorney NYC