Privacy Will Cost You: Co-op and Condo Tax Abatement To Be Taken Away From LLCs and Trusts

Buildings with lots of LLC-owned apartments like the Laureate are likely to suffer the most.

Buildings with lots of LLC-owned apartments like the Laureate are likely to suffer the most.

During the past decade, it has become increasingly popular for  home buyers—particularly those with bold-faced names—to shield their identities with LLCs and trusts. By using an LLC, a privacy-minded person can (usually) prevent sleuths from salmon-colored papers like this one from dredging up their purchase from city records and exposing how much they paid and what their new kitchen looks like.

But while such identity cloaking has become all but de rigueur for the celebrity buyer and a matter of preference for other press-averse people, the cost of privacy is poised to go up considerably. That’s because the city’s co-op and condo tax abatement, which has been enjoyed by nearly all co-op and condo owners at a sizable 17.5 percent since 1996, will no longer be available to those who own their apartments through LLCs or trusts. The change will mean considerably higher taxes for some 7,700 property owners.

This winter, the State Legislature voted to extend the condo and co-op tax abatement—which was initially enacted as a temporary measure to eliminate the discrepancy between the taxes on single family homes and the much higher taxes on homes in multi-unit buildings—through June 30, 2015. But this time around, the Legislature decided to exclude pied-a-terres from the abatement program—a category which the city’s Department of Finance says includes all trusts or LLCs.

“There is no provision in the new coop/condo abatement law that allows the beneficial owner of a trust or an LLC to qualify for the benefit,” Department of Finance spokesman Owen Stone wrote to The Observer in an email explaining the policy change. “As you know a new law was enacted last month that restricted the eligibility for the coop/condo abatement to only primary owner occupied residences. We have not changed our interpretation of the law- the law has changed. Under the previous law, there was no restriction, and LLCs and Trusts could qualify, under the new law, they do not.”

Which has not stopped many in the real estate community from slamming the policy as unfair.

“They’re penalizing people who want their privacy or the convenience of owning in a trust,” said Eva Talel, a real estate attorney and partner at Strook & Strook & Lavan. “For reasons of privacy, not wanting the world to know what you own is perfectly reasonable at any income level, and to throw the people out of this abatement program seems to be fundamentally unfair.”

“I think there must be a misconception somewhere down the line that things like LLCs or trusts are for rich people, but you don’t have to be rich or advantaged to put your home in a trust,” she added, noting that given the high cost of New York real estate and its rapid appreciation over the last two decades, many New Yorkers count their home as their primary asset. Why should they be punished for trying to lessen their tax burdens in a perfectly legal way?

Even co-op boards, which are notoriously hostile to pied-a-terres (and for demanding reams of personal documentation and disclosure from potential buyers), have started acknowledging the need for trusts in estate planning. More and more of them are now allowing established residents to transfer their apartments into trusts.

“No one would have expected that there would be adverse tax consequences to buying in a trust or an LLC. There aren’t otherwise,” she said. ” I think they made a social engineering decision that these units were owned by more affluent people in more affluent co-ops and were therefore fair game.”

(Another real estate professional likened the change, coming in conjunction with larger tax breaks for less valuable co-ops and condos, to “class warfare.”)

Ms. Talel also pointed out that the decision to give the tax benefit to only some condo and co-op owners violates the spirit of the original abatement, which was intended, in lieu of more far-reaching tax reform, to equalize the tax burden on single-family homes and those in multi-unit buildings. Townhouse owners are not subject to any restrictions or requirements, primary residence-related or otherwise, to enjoy their lower tax rates. Why should there be a different standard for co-op and condo owners?

Mary Ann Rothman, the executive director of the Council of New York Cooperatives & Condominiums, told The Observer that the Council begged the Department of Finance to reconsider their interpretation, particularly in respect to trusts.

“We told them that 99 percent of the time, there’s an agreement between the co-op board and the trust that only the trust-holder will live there,” she said, adding that trust-holders can apply for other benefits, like the STAR program.

Ms.Rothman said that building managers are up-in-arms about the changes to the law, which will be phased in over this tax year and the next. It’s also a relatively recent shock—while the primary residence requirement has been anticipated for some time, few anticipated that trusts and LLCs would be excluded from that category.

An additional problem is that in some condo buildings more than three-quarters of the units are owned by LLCs—a serious problem for developments that used the tax benefit for maintenance or capital improvement projects. Now, managing agents will need to either raise maintenance fees or figure out how to cover the lost income.

For its part, the Department of Finance says that its hands are tied, but that it is exploring the possibilities for extending the benefit to some trusts.

“We are continuing to review our options regarding eligibility for beneficial owners of trusts,” Mr. Stone wrote. “We will listen to the concerns of those who have questions regarding the eligibility for beneficial owners of trusts, and will take them under consideration.”

The department is unlikely to hear many complaints from the property owners themselves, though. While LLC owners will no doubt grumble to their friends, their lawyers and their property managers about the new “privacy tax,” we don’t anticipate many outspoken opponents or resounding outcries from a group that prefers to remain off the record and under the radar.

kvelsey@observer.com