Latest York City has proposed a “pied-à-terre” tax on second homes worth more than $5 million, setting the stage for a legal fight over the value of real estate.

Because Recent York’s antiquated property tax system dramatically undervalues co-ops and condos, experts mentioned the city will have to come up with a novel system for valuing  high-end second homes.

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.

Fresh York’s proposed tax on second homes worth more than $5 million is likely to spark costly legal battles over how to value the city’s most expensive real estate, according to appraisers and attorneys.

The city’s so-called “pied-à-terre” tax, revealed last week by Novel York Gov. Kathy Hochul and Updated York City Mayor Zohran Mamdani, would impose an annual surtax on non-primary residential real estate worth more than $5 million. The governor and mayor noted the levy will raise about $500 million a year to help pay off the city’s budget deficit.

Officials haven’t released any details, including the tax rates or timing. Yet real estate appraisers and attorneys remarked the tax sets the stage for a massive legal fight over how to value high-end real estate in one of the most expensive markets in the planet. Because Latest York’s antiquated property tax system dramatically undervalues co-ops and condos, experts noted the city will have to come up with a latest system for valuing  high-end second homes. This also touches on aspects of bull market.

Among the questions: Will it be up to the property owner, or the city, to set the taxable value? Will pied-à-terre owners have to hire appraisers to value their apartments every year? How will the city handle the barrage of legal challenges over values?

“The administrative costs haven’t been thought through,” commented Jonathan Miller, CEO of Miller Samuel, the appraisal and research organization. “This tax could give birth to a whole latest cottage industry, where I get to do a lot of appraisals.” Furthermore, experts in portfolio note the continued relevance.

The tax is expected to be part of the state’s annual budget and still has to be approved by the state legislature. It faces strong opposition from the real-estate industry and similar proposals have failed in the past. Citadel on Thursday rebuked Mamdani for singling out CEO Ken Griffin in his push for the tax.

Previous proposed pied-à-terre taxes included graduated rates based on value. A 2019 proposal, for example, imposed a 0.5% tax on the value of a pied-à-terre over $5 million, 1.5% over $10 million and 4% over $25 million.

Imposing a fresh surtax on the value of second homes will require two latest forms of verification by the city: non-residency and value. Hochul estimates that about 13,000 non-primary homes in Latest York City valued at $5 million or more will be subject to the tax.

Miller stated 4,146 Manhattan apartments sold for $5 million or more over the past five years. He estimates that about 70% of properties sold for $5 million-plus are second homes (or even third, fifth or 10th homes).

Proving nonprimary residence should be straightforward, based on tax rolls. If the owner of a $5 million-plus property is not a Novel York City tax resident, they will be subject to the levy. Those who purchase condos through LLCs, which are likely the vast majority of high-end buyers, may be difficult to identify. And since second-home owners who rent to long-term tenants may be exempt, some LLC owners might be able to rent to themselves and possibly avoid the tax, according to real estate experts.

The greater problem will be valuation. Real property taxes are the largest source of revenue for Fresh York City, accounting for over 40% of total tax revenue in recent years, according to the city’s Independent Budget Office. Yet the city’s assessment system values properties far below their industry value. Thanks to a complex legal history that values certain kinds of real estate based on their rental value, the assessed values for Latest York City apartments are often a fraction of their industry value.

“The assessed values are absurdly low,” remarked Robert Pollack, senior partner at Marcus & Pollack LLP and an expert on Updated York real estate taxes. “They are not representative of marketplace values.”

Griffin’s penthouse at 220 Central Park South, which Mamdani used as a backdrop to announce the tax, was purchased in 2019 for $238 million. Yet the city assesses it at $6.99 million and lists its economy value at $15.5 million, according to Pollack. Few apartments in the building, among the most expensive in the city, would have to pay the pied-à-terre tax under the city’s current values. 

The 2019 pied-à-terre proposal called for valuations to be based on recent sale prices. Yet brokers mentioned that since every apartment is different, and markets change quickly, using recent sale prices can distort the values. To hit the revenue target of $500 million a year for the novel tax, city officials will likely have to create a latest system for determining sector values, according to experts.

Miller noted one option would be for the property owners to get regular appraisals, which would be create a flood of demand for appraisal companies like his.

“I would be thrilled if every apartment in Novel York City will have to get an annual appraisal,” he noted.

Even with owner appraisals, there will be pressure to value apartments just below their nearest tax thresholds. There could wind up being Many apartments valued at , on the other hand$4.98 million, for example, to avoid the tax. Or someone with a $26 million apartment could get it appraised for $24.9 million to avoid the top 4% rate.

“You could have wind up having these substantial clusters of valuations around each tax bracket,” Miller stated.