Pied-à-Terre Tax Hits NYC Luxury Real Estate in Divorces

Divorce attorney Jacqueline Newman thought one of her cases was nearly wrapped up. Her wealthy client and soon-to-be ex-spouse had maybe one or two issues left to hash out in settlement talks. Then came a wrinkle: the city’s impending pied-à-terre tax.

The client’s former partner wanted the Tribeca co-op, valued at more than $5 million, for trips into New York City — and she wanted her ex to cover the annual 6.5 percent tax surcharge the city’s new pied-à-terre tax is expected to impose on the unit beginning in January.

For Newman, a managing partner at Berkman Bottger Newman & Schein LLP who specializes in high-net-worth divorces, the tax has come up at least 10 times with her clients. “People like to fight in a divorce, and now we have something new to fight about,” Newman said.

When a well-heeled couple splits, a question is often: who gets the Manhattan crash pad? But with next year’s anticipated pied-à-terre tax looming — hitting co-ops and condos valued at $1 million or more and single-family homes worth $5 million-plus with surcharges between 0.8 and 6.5 percent — the question in high-end divorce talks is becoming: who gets stuck with the hefty annual tax bill?

Interviews with more than a half-dozen divorce attorneys show that the controversial levy is already reshaping the often messy and highly personal business of dividing real estate assets during a high-net-worth split. For affluent exes, the surcharge is an expensive line item — ranging from hundreds of thousands to millions of dollars each year — and a new liability in settlement talks.

Creative solutions

The pied-à-terre tax has fundamentally upended the calculus of high-end divorces.

Say a couple is dividing their real estate assets across cities and a spouse offers the swanky Manhattan apartment in exchange for the comparably priced Miami condo. It’s no longer an even trade.

“It was trading apples for apples before. Now it’s trading apples for oranges,” said Val Kleyman, founder of Kleyman Law Firm. “If I take the one in New York, I have to pay this dumb tax. If I give you the one in Florida, you get the condo with no weird tax.”

Some inventive deal-making could be on the horizon, Kleyman added. He could envision a scenario where one spouse says, “How about we make a deal? You live in this property for the next five years and, instead of getting divorced, we stay separated to avoid this tax.”

The levy could also push couples to sell a pied-à-terre sooner rather than later, especially since a property would continue to rack up the tax surcharge each year the divorce drags on, said Lisa Zeiderman, managing partner at Miller Zeiderman LLP.

According to Zeiderman, it’s common for Manhattan divorce cases to take two to five years to resolve — a long time, she noted, for couples or one of the spouses to shoulder the tax. “No matter how much money someone has, that is real money that you’re talking about,” she said.

For splitting spouses with children, another approach is to live in the pied-à-terre but “nest” in the family home, where the children live full-time, added Zeiderman. In divorce, nesting is a temporary arrangement in which children live in one home, and the parents take turns moving in and out to care for them.

The concept is a reversal of another possible trend among second home owners: moving their college-age or recently graduated children into a pied-à-terre in a move to avoid the tax.

“You can turn the lemons into lemonade, right?” she said. “Instead of everyone having to live in that same house, you could actually utilize the pied-à-terre.”

Not everyone will be in such a cooperative mood. On the other end of the spectrum, some may look to wield the pied-à-terre tax as a tool to “get under the skin” of a former partner, Kleyman said. One of his clients asked whether the tax could be used to twist the knife, so to speak.

“The spouse actually, out of spite, wants to inflict pain on this other spouse by saying, ‘I’m gonna leave this place, and there’s going to be a tax, and you’re gonna pay for it,’” Kleyman said. (He advised that this would be an unwise approach.) The client moved out of their condo to stay with family in St. Barts; their former partner is living in the unit while they search for a new home.

“Listen, this is divorce. People use all kinds of tactics,” Kleyman said. “We pulled back on that because I told them to be careful with this.”

Plenty of unknowns

Whatever the outcome, the levy — and uncertainty over its implementation — adds another layer of stress to an already years-long and expensive divorce process. As separating couples try to game the tax, questions remain about how the levy will be litigated in courtrooms, from family court to the New York Supreme Court.

Spouses who hope to retain their city pied-à-terre will have to decide whether keeping the property as a part-time home is worth the cost. For people in at least three cases pending with Yonatan Levoritz, founder of Levoritz Law Firm, that calculation boils down to one question: How do I get my former partner to pay the tax?

In those cases, spouses who earn less than their ex — “non-moneyed” as Levoritz calls them — tended to want to keep the pied-à-terre, while the higher earner would rather sell than pay the tax to maintain their former partner’s habits.

“You’re running into situations where basically you’re pushing for a needs-based award, and the question comes down to: what are judges going to do about this?” Levoritz said. “Are judges going to go ahead and force people to maintain the lifestyle, or say, ‘You know what, this tax is just too high. We’re going to sell the asset.’”

Levoritz’s best guess is that keeping the pied-à-terre, with its costly annual tax surcharge, will be a tougher sell to judges. It may just be easier to sell — and for a spouse to ask for other perks.

“The math works out better to say, ‘Give me a couple extra bucks so I can have my vacation time,’ rather than having the second residence,” Levoritz added. “Which can end up being a windfall to both parties, in terms of at least getting their money out of the apartment.”

That’s the more sensible option, but Levoritz said he’s skeptical that’ll come to pass because “at least for my clients, no one gets along.”

The jury is similarly out on how the tax will affect property values, according to three appraisers. A unit subject to the levy under one owner may not be subject to it under the next, depending on how the buyer plans to use the property — which complicates how appraisers determine how much, if any, of the tax is reflected in sale prices.

Some properties may also suddenly become pieds-à-terre and face the tax, since spouses commonly relocate during a divorce.

Even the tax’s first surcharge payment, planned for Jan. 1, is somewhat up in the air. A group of homeowners filed a lawsuit challenging the city’s implementation of the tax that may affect the timeline, with a ruling expected any day. But more cases may soon pop up; tax lawyers say that constitutional challenges against the surcharge could also be on the horizon.

One of Newman’s clients raised the tax’s legal uncertainty while discussing how to factor the potential levy into financial support for a spouse.

“Somebody brought that up, saying, ‘Well, what if we ended up making a deal and factoring in this tax, and then it ends up going away?’” Newman said. “The uncertainty is something we just have to navigate. It is a stay-tuned situation.”