Overview of the NYC Pied-à-Terre Surcharge: Key Provisions, Open Issues, and Practical Implications for Property Owners

After the New York City Department of Finance (DOF) published its proposed PAT rules back in June, a public hearing was held, followed by submission of public comments. On July 14, 2026, the DOF adopted its final administrative rules for the PAT surcharge. While the Final Rules clarify certain ambiguities in the new law, several issues remain.

The DOF began implementing the PAT surcharge in July 2026 when it published a supplemental assessment roll including, but not limited to, all one-, two-, and three-family homes, as well as all cooperative and condominium properties, that may be subject to the surcharge. This is the first opportunity for the public to determine whether their property may be implicated. In addition, the DOF began issuing notices to property owners that may be subject to the tax. Receipt of the notice is not determinative, and, as discussed below, property owners will have an opportunity to appeal and demonstrate that the property qualifies for one of the statutory exemptions. 

While the deadline to do so was previously extended to September 18, 2026, the PAT surcharge was subsequently stayed by the Supreme Court of Richmond County on August 10, 2026. As of August 13, 2026, the temporary restraining order itself has been stayed by the Appellate Division (Second Department), pending the city’s appeal of the temporary restraining order, allowing New York City to continue its rollout.

Properties Subject to Surcharge

The PAT surcharge applies to a “covered property” held by a “covered owner,” as those terms are defined under New York City Administrative Code § 11-3201, unless the property qualifies for a statutory exemption or is otherwise excluded. In short, the surcharge potentially applies to (1) one-, two- and three-family homes valued by the DOF at more than $5,000,000 (Class One properties), and (2) condominium and cooperative units valued at $1,000,000 or more (rising to $5,000,000 as of July 1, 2028) (collectively, Class Two properties). The initial taxable status date for determining ownership, value, and primary residence status under the PAT surcharge was January 5, 2026. The taxable status date for the upcoming 2027-2028 fiscal year is January 5, 2027.

The term “covered owner” means: (1) owners of class one (1 to 3 family) real property; (2) tenant-stockholders in a cooperative corporation; (3) owners of residential condominium units; (4) beneficial owners of trusts holding such property or cooperative apartment shares, provided they are the sole beneficiaries; or (5) partners, shareholders, or members holding a majority interest in a partnership, corporation, or LLC that holds such property or cooperative apartment shares.

The exemption applies when the property is the primary residence of: (1) the property owner, (2) a tenant or subtenant, (3) one or more individuals who collectively hold a majority interest in an entity that owns the property, (4) an immediate family member of the owner or majority interest holder, or (5) the sole beneficiary or beneficiaries of a trust that owns the property.

The PAT surcharge applies to the property, not the owner. Thus, if a property owner fails to pay the surcharge, the property would be subjected to a lien for the unpaid amount, plus penalties and interest, and the next owner of the property would inherit that lien. Parties may, therefore, want to address the impact of this lien when negotiating a subsequent sale of the property. 

Two Phases

 There will be two phases for the valuation and rate structure applicable to properties subject to the PAT surcharge, as described below. The rates provided below will apply to the total value of the property. 

Phase 1: July 1, 2026-June 30, 2028

Under Phase 1, Class One properties and Class Two properties are treated differently. For Class One properties, notably one to three family homes, the surcharge is assessed when the value is at least $5,000,000. For Class Two properties, condominiums, and cooperative apartments, the surcharge is assessed if the value of the property is at least $1,000,000. 

For cooperative apartments, the value is imputed, based on the total building value (e.g., by multiplying the value of the entire building by the individual apartment’s specific stock share allocation), whereas for all other Class Two properties and for Class One properties, it is based on the current DOF assessed value. Pursuant to Chapter 58 of the New York City Charter, the DOF assessed value is calculated based upon the current DOF assessments translated into market values (which are not based on comparable unit sales).

Under Administrative Code Section 11-3204, the tax rates for Class One and Class Two properties are as follows.

Class One

• $5,000,000 - $15,000,000: Rate of .8%.

• $15,000,000 - $25,000,000: Rate of 1.05%.

• Over $25,000,000: Rate of 1.3%.

Class Two

• $1,000,000 - $3,000,000: Rate of 4%.

• $3,000,000 - $5,000,000: Rate of 5.25%.

• Over $5,000,000: Rate of 6.5%.

Phase 2: July 1, 2028-June 30, 2031

In Phase 2, for Class Two properties, the threshold amounts will increase and the rates will decrease, in that the threshold amounts and rates will become the same for all classes of property (e.g., the Class One rates provided immediately above). This change is attributable to a change in the DOF’s methodology for valuing condominiums and cooperative apartments. For Phase 2, the DOF will value such Class Two properties based upon comparable sales instead of assessed values. Note that the assessed values are typically significantly lower than the comparative sales value, which explains why the rates for these properties change from Phase 1 to Phase 2.

Primary Residence for Individuals

Under Section 62-06 of the Final Rules, the DOF will rely upon records in its possession, such as income tax data, to make an initial determination of whether a property constitutes a primary residence, thereby exempting such property from the PAT surcharge. For fiscal years beginning on or after July 1, 2027, if the DOF cannot make a determination based on such objective data, the Final Rules provide that it can consider whether the property was occupied by a covered owner for a majority of days during the immediately prior calendar year and that the covered owner indicated that such covered property is his or her permanent residence in other documents previously submitted to New York City. 

Note that where a residence is being renovated or rehabilitated and the owner intends to use the property as their primary residence once such work has been complete, the property does not necessarily benefit from an exemption. On the other hand, under New York City Administrative Code Section 11-3201, properties for which a temporary or permanent certificate of occupancy is required but not yet issued, as well as cooperative apartments still held by a sponsor under an effective offering plan, are excluded from the PAT surcharge.

Primary Residence for a Business Entity

As discussed above, a “covered owner” includes the shareholders, partners, or members holding a majority interest in the corporation, partnership, or LLC that owns the covered property. The Final Rules state that, for the purpose of determining whether a person is a “covered owner,” a property or shares of stock are deemed “held” by a partnership, corporation, or LLC only where such entity holds an undivided fee interest in the property or holds all such shares of stock. 

In its Final Rules, the DOF also provides that ownership interests of shareholders, members, or partners of a corporation, LLC, or partnership may be aggregated for the purpose of determining whether they meet the majority ownership element of a “covered owner.” Specifically, a majority interest is established, for a corporation, if the aggregate ownership interests equal more than 50% of the total combined voting power or total fair market value of all stock classes and, for a partnership or LLC, if the aggregate ownership interests equal more than 50% of capital or profits. 

To establish primary residency, shareholders, members, or partners of a corporation, LLC, or partnership who collectively are “covered owners” of a property or shares of a cooperative apartment must demonstrate that the property serves as the primary residence of those holding a majority interest.

Primary Residence for a Trust

With respect to a trust, the term “covered owner” includes the beneficial owners who are the sole beneficiaries of the trust that owns the covered property. The DOF clarified in the Final Rules that multiple individuals can qualify as the “sole beneficiaries” of a trust. The Final Rules also clarify that contingent or future interests will not be considered in the determination of whether the current beneficiaries are the sole beneficiaries of a trust. Accordingly, a current beneficiary of a trust that holds a primary residence is not necessarily barred from qualifying for the PAT surcharge exemption on the basis that the trust names other beneficiaries, holding a contingent or future interest.

Finally, the sole beneficiary of the trust must be the primary resident. Unlike the general exemption, an immediate family member of a trust beneficiary does not independently qualify under the rules. 

Other Ways to Qualify for Primary Residence Exemption

A property qualifies as a primary residence if it is occupied as the covered owner’s primary home, or as the primary home of one of their immediate family members, defined as a spouse, sibling, child, parent, grandparent, or grandchild. A property may also qualify if it is leased under a bona fide arm’s-length lease for a term of not less than one year.

Under the Final Rules, an “arm’s-length transaction” is defined as a lease or sublease of a covered property — or a dwelling unit within one — that meets several criteria: (1) the transaction must be entered into in good faith and for valuable consideration reflecting fair market rental value, (2) both parties must be informed and willing participants, with neither acting under compulsion, and (3) the circumstances must not suggest a reasonable possibility that the lease or sublease was structured primarily to circumvent the surcharge. 

Notice and Appeals

In future years, the DOF must issue a notice to owners whose properties have been identified as possibly being subject to the PAT surcharge by February 15, except that for this current year, the notice shall be transmitted no later than August 30, 2026. The notice will include the surcharge amount based on phase one or phase two market value of the covered property. The validity of the surcharge is not affected by the failure of the DOF to issue a notice. 

Under New York City Administrative Code Section 62-06(b), owners who receive a notice will have the opportunity to submit rebuttal evidence within 30 days of transmittal, or, if no such notice is received, 30 days after the date such surcharge appears on the assessment roll. September 18, 2026 is the appeal deadline for all affected properties. 

Homeowners can submit an appeal on the basis that they qualify for the primary residence exemption or that the market value attributed to their property is incorrect due to a clerical error or an error in the property’s description. 

Taxpayers must submit their appeals, if desired, through an electronic portal designated by the DOF. The appeal must include certification that such property is used as a primary residence and proof that the covered property is the primary residence of the person who is the covered owner, an immediate family member of such person, or a lessee or sub-lessee. The DOF will review the submitted documentation and issue a final determination, but taxpayers can pursue administrative remedies or judicial review. Taxpayers who receive notice and are seeking an exemption should retain copies of all communications from the DOF and their supporting documentation, so that this can be relied upon and presented if such remedies are sought.

Under New York City Administrative Code Section 62-04 of the Final Rules, the DOF may impose penalties if the property owner submits materially inaccurate or misleading information, either negligently or in bad faith. If the submission would result in an exemption from the surcharge, the penalty is 50% of the applicable surcharge, plus reinstatement of the original surcharge. If the submission would result in a lower valuation and a reduced surcharge, the penalty is 300% of the difference in surcharge, capped at 50% of the surcharge that would have applied.

The DOF also has authority to issue regulations permitting any certification or documentation that is submitted to be subject to audit during a period of six years from the date of submission.

Planning Going Forward

Looking ahead, homeowners may consider restructuring their estate plans to qualify for an exemption to the PAT surcharge. With respect to residences held in trust, homeowners would want to ensure that the trust is structured such that its sole beneficiaries use the property as their primary residence. With respect to residences held by a business entity, homeowners would want to ensure that the residence is held by a single entity (as opposed to a multi-tiered entity structure) and that the entity holds an undivided fee interest in the property or holds all its shares of stock. Alternatively, the homeowners may consider leasing the residence for a period of at least 12 months, under a bona fide arm’s-length agreement. To the extent that homeowners wish to make any such changes to their estate plans, they must do so by January 5, 2027, which is the taxable status date for the purpose of the DOF’s next surcharge determination.

Open and Unresolved Issues

The Final Rules leave open questions for properties owned through trusts. Without proper guidance, taxpayers and their advisors may struggle to understand the rules’ application. For example, the Final Rules are unclear as to whether an exemption is available if only a single beneficiary of a multi-beneficiary trust is occupying the property as his or her primary residence, or in the case where the primary occupant of the residence is the grantor of a grantor trust or a trustee of a trust that is neither the grantor nor a beneficiary. The Final Rules also reference a “primary resident trustee” but do not define that term. 

In addition, the Final Rules are incompatible with the legal structure of a cooperative building and place an undue burden on such entities. Since members of a cooperative building hold shares, rather than units, the surcharge is applied to the cooperative building rather than to its individual shareholders. The onus thus falls on the cooperative building to determine which shareholders triggered the surcharge and to obtain tax payment. The DOF declined to make any changes to the Rule on the basis that allocation of liability among shareholders should be addressed in a cooperative building’s proprietary lease.

Conclusion

The PAT surcharge represents a significant new tax obligation for owners of high-value residential properties in New York City that are not used as primary residences. While the DOF’s Final Rules address some of the ambiguities in the enabling legislation, several important issues remain unresolved.

Property owners, cooperative boards, managing agents, and their counsel should closely monitor the DOF’s implementation of the surcharge, including any additional guidance materials the DOF may publish, developments in the Phase 2 valuation methodology expected to take effect on July 1, 2028, and any legislative proposals that may be introduced to address various concerns identified in the public comment process. 

In the meantime, affected parties should evaluate and review their ownership structures, current lease agreements, plus proprietary leases and other transactional documents, as well as consult with tax counsel to assess their exposure and preserve their appeal rights. In consultation with their trust and estate and real estate counsel, homeowners can take affirmative steps over the course of the coming months, prior to the next taxable status date on January 5, 2027, to qualify for the primary residence exemption.