Do Smaller NYC Condo Buildings Pay Lower Property Taxes?
Go Back To Previous PageIs it true that smaller condo buildings pay lower taxes? An interesting aspect of New York City’s current property tax system is that homeowners in condo and co-op buildings with ten or fewer units pay lower property taxes than unit
owners in buildings with 11 or more apartments. In other words, two similarly sized condos in the same NYC neighborhood, with similar market values, can have significant differences in property taxes solely due to the number of apartments in each building.
We noticed this phenomenon numerous times: Two similarly sized pre-war condos have significantly different property tax bills. The owner of one property may pay thousands of dollars more in property taxes than the owner of another, even though both properties have virtually identical square footage. Sometimes, the unit with higher property taxes may even be in a slightly less desirable location.
The NYC Department of Finance categorizes both condo buildings as ‘Class 2’ properties and uses a similar tax computation methodology, so how is such a difference possible?
Class 2 buildings with ten or fewer units benefit from a state law limiting assessed value increases.
The maximum increase is 8% from the previous year or 30% over five years.
The assessed value of Class 2 buildings with more than ten units can increase without limit.
However, any changes in assessed value for condo buildings with 11 or more units will be gradually implemented over five years. While this evens out changes over time, it does not impose a specific limit on growth rates, as is the case for Class 2 buildings with ten or fewer units.
Under state law, the Department of Finance assesses all Class 2 properties based on potential income.
- Large condo buildings (11 or more units): The Department of Finance estimates the income and expenses for a building by comparing it to similar rental properties in terms of size, location, number of units, and age. Subsequently, they apply a capitalization rate to the building’s estimated net income to determine its market value.
- Small condo buildings (10 or fewer units): The Department of Finance estimates the typical income per square foot generated by comparable rental properties. They then calculate the total income for the building by multiplying the income per square foot by the building’s total square footage. Lastly, the Department of Finance multiplies the building’s estimated income by a multiplier to determine its market value.
The property’s market value is multiplied by 45% to determine the assessed value for property tax purposes.
- It’s important to note that the assessed value is subject to growth caps for buildings with ten or fewer units.
- For larger condo buildings, assessed value phases over five years.
One- to three-family homes in NYC (Class 1 properties) also benefit from a cap on assessed value growth, similar to apartment buildings with more than ten units. State law limits the assessed value increases for Class 1 properties to 6% per year or 20% over five years. These limits are stricter than the 8% and 30% limits for buildings with 11 or more units.
The assessed value growth cap on Class 1 properties is why townhouses in rapidly gentrifying parts of Brooklyn (such as Bed-Stuy and Bushwick) have significantly lower property values than similar properties in Manhattan. NYC’s current property tax system provides much more favorable tax treatment for townhouses than condos and co-ops, so authorities established the Cooperative and Condominium Tax Abatement.
Conclusion
In short, the current property tax system in New York City is extremely complex and filled with significant inequalities. While authorities discuss property tax reform, we expect changes to be contentious and may take years to come to fruition, if at all.
Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.
