What a Rhode Island Pied-à-terre Tax Suit Could Mean For NY

A group of homeowners in Rhode Island is fighting a new tax on luxury second homes in the state, which could set the stage for future challenges against a similar provision in New York City.

Earlier this month, 40 homeowners sued the Ocean State, its taxation department and its tax administrator over a new surcharge on pieds-à-terre assessed at $1 million or more. The levy, nicknamed the “Taylor Swift tax” after the pop star who famously owns a Westerly mansion, took effect in July after lawmakers approved it last year.

The complaint, filed in Newport County, alleges the tax is unconstitutional because it “selectively targets out-of-state residents who do not vote in Rhode Island and therefore cannot unseat the supporters” of the levy. It also accuses state lawmakers of relying on “demonstrably false” claims to establish the tax, including that luxury second homeowners use more municipal services than other owners and that they don’t maintain their properties.

“The law does violence to one of our democracy’s animating principles: ‘no taxation without representation,’” according to the lawsuit, which asks the court to bar the state from enforcing the tax and to refund homeowners who have already started paying it.

What happens with the lawsuit in Rhode Island could inform the next steps in New York, which earlier this year adopted its own controversial tax on luxury pieds-à-terre in the city. Mayor Zohran Mamdani’s administration has come under fire in recent weeks for the bumpy rollout of the tax, which included notifying several full-time city residents that they would be subject to the levy if they didn’t file an exemption proving their homes were their permanent residences.

The Rhode Island case “for sure could have implications generally, not just in New York, but also in other states that have or are considering taxes like this,” said Matthew Cammarata, a tax lawyer with Lowenstein Sandler.

He said that the Rhode Island lawsuit “raises strong arguments” with the “general idea being that state laws can be declared unconstitutional if they treat residents and non-residents differently,” adding “It could certainly influence how people approach challenging the law in New York.”

Andrew Freedland, an attorney with Herrick, expressed similar sentiments, though he added that while the Rhode Island lawsuit could provide a framework for potential actions in New York, “it’s got a long way to go before it really has any sort of precedential value,” if it ever even gets that far.

Freedland also cautioned that while the taxes are somewhat similar, they are separate laws playing out in completely different states and apply different tax rate structures — all of which could impact how challenges to the New York tax shape up.

Three Staten Island homeowners sued the city over the rollout in early August, claiming it failed to use existing records, such as tax returns, to verify owners’ residency status before “arbitrarily and capriciously” shifting the burden to them to appeal the tax hike.

The lawsuit triggered a series of court battles that raised questions about whether the city would be able to continue implementing the tax, though an appellate court gave the administration the green light while its appeal of a temporary restraining order is in process. Additional plaintiffs have since signed on to the suit, which will now go forward in Manhattan.

But the litigation playing out in New York City specifically relates to the rollout of the tax, not the tax itself. Homeowners have yet to take the levy to court, though Cammarata said he expects that litigation is likely on the horizon, which could include similar arguments to the Rhode Island case or focus on the city’s interpretation of the state law establishing the tax.

“This is sort of rapidly developing, so it won’t surprise anybody if there are potential challenges,” Cammarata said.

The city once again extended the deadline for owners to file exemptions to Oct. 6.

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Owners of pieds-à-terre in New York City that could be subject to the new tax are searching for full-time tenants for their properties, which could exempt them from the levy, agents told The Real Deal earlier this week.

Luxury rentals have been in high demand, particularly in Manhattan and prime Brooklyn neighborhoods, with many prospective renters prepared to shell out tens of thousands of dollars in monthly rent. It could be the best of both worlds for the market, as owners can avoid the surcharge and inject more options into a market strapped for inventory.

But in order to avoid the tax, owners must ensure that their tenants plan to live in those homes for the duration of the lease, which could be a tall order for the wealthy class of renters who are often only choosing to rent instead of buy due to the flexibility.

Agents told TRD that some owners are starting to add provisions in leases stating that the tenant will live in the home full-time and that they will indemnify the landlord if the owner gets hit with the tax because the tenant hasn’t been using the property.

NYC Deal of the Week

The priciest deal to land in city records this week was a townhouse in Soho, which sold for $14.9 million. The 25-foot-wide abode at 30 Sullivan Street hit the market in September asking just under $20 million. It last traded for $12.3 million in 2019.

The home has five bedrooms and four full bathrooms spread across four stories and 5,900 square feet. It also features a roof deck, finished basement with a gym and back garden.

R New York’s Stefani Berkin had the listing. Compass’ Daniel Blatman brought the buyer.