Are You Also Confused How New York City's Pied-à-Terre Tax Applies to You?

In the late days of summer 2026, homeowners may have received a notice from the New York City Department of Finance (DOF) regarding the implications of New York's Pied-à-Terre Tax Law (PAT Tax) on their residential property. Holland & Knight published two alerts – "New York State Enacts Pied-à-Terre Tax on Expensive Non-Primary New York City Residences," June 4, 2026, and "The Impact of New York's Pied-à-Terre Tax on Homeowners," July 20, 2026 – detailing the PAT Tax and discussing some of the flaws with the PAT Tax as applied to cooperatives (co-ops) and condominiums.

Following the adoption of the DOF's final rules, NYC Admin. Code Section 61-01 through 62-08, on July 10, 2026, and recent mailing of thousands of surcharge notification letters, homeowners are facing uncertainty regarding whether the PAT Tax applies to their residential property and their options if they believe a letter was sent to them erroneously. This alert describes additional clarification received in the DOF's final rules, applies these rules to some common scenarios (including highlighting where confusion continues to arise) and alerts homeowners how and by when to respond to these letters.

Overview

The PAT Tax applies generally on any "covered property" in New York City that is not a "primary residence" of a "covered owner," subject to certain minimum valuation thresholds for such covered properties under a two-phase rollout. The PAT Tax is effective July 1, 2026, with an initial application date of January 5, 2026, and it sunsets on June 30, 2031, unless extended by the New York Legislature. A "covered property" is defined as all real property (other than property specifically excluded under the PAT Tax) that is classified as 1) Class 1 property (one-, two- and three-family homes) that is not vacant land, 2) Class 2 residential co-ops with at least one dwelling unit that is not a primary residence (and has a Phase 1 market value of $1 million or more or Phase 2 market value of $5 million or more) or 3) Class 2 residential condominium units. Some excluded properties may include Class 1 or Class 2 properties that require a certificate of occupancy that have not yet been issued or a condominium or co-op unit that is subject to an offering plan and has not been sold.

A "primary residence" is defined as a covered property used, as of the application date immediately preceding the fiscal year in which the PAT Tax is imposed, as a primary residence by 1) one or more "covered owners" or an "immediate family member" (a spouse, child, sibling, parent, grandparent or grandchild) of a covered owner who is a natural person or 2) one or more tenants, including any subtenant who is lawfully occupying the property, provided that such tenant or subtenant is a natural person and occupies the covered property under a bona fide, arm's-length lease with a lease not less than one year. The application date is January 5 immediately preceding the fiscal year in which the PAT Tax is imposed, regardless of any midyear changes in ownership or occupancy. The definition of "covered owner" is the most substantive analysis and confusing part of the PAT Tax's application for homeowners and their advisors.

A "covered owner" has five categories: 1) an owner or owners of real property classified as Class 1 property, 2) a tenant-stockholder of a co-op with an interest represented by shares of stock in the co-op, 3) an owner of a condominium unit, 4) one or more beneficial owners of a trust, provided that such beneficial owner or owners are the "sole beneficiaries" of such trust, or 5) a partner, shareholder or member of a partnership, corporation or limited liability company (LLC), provided that such partner(s), shareholder(s) or member(s) hold a majority interest in such entity. Importantly, the first through third categories above apply only when the applicable owner directly owns the property (or shares of stock in the co-op). These categories' broad application required additional clarification under the DOF's now final rules. Before reviewing these rules, the PAT Tax's two phases with applicable market values and surcharge should be reviewed to understand the potential surcharge consequences.

PAT Tax's 2-Phase Rollout

Phase 1 covers fiscals years beginning on or after July 1, 2026, through June 30, 2028, with covered properties having a market value determined by the DOF in such fiscal year using the current property tax roll methodology.

Phase 1 for Class 1: One-, Two- and Three-Family Homes

Phase 1 for Class 2: Condominiums and Co-Ops

Phase 2 unifies the applicable surcharge rates and valuations for Class 1 and Class 2 properties and applies to fiscal years beginning on or after July 1, 2028, through June 30, 2031. Class 2 covered properties will presumably transition to a comparable sales approach.

Phase 2 for Class 1 and Class 2 Properties

The DOF's Final Rules for the PAT Tax

Following a public hearing and submission of public comments, the DOF adopted its final administrative rules (Final Rules) on July 14, 2026, for the PAT Tax. Also in July 2026, the DOF published a supplemental assessment roll for covered properties that may be subject to the PAT Tax. Now, the DOF has begun issuing determination notice letters to property owners and, though the receipt of a notice is not determinative, property owners may want to consider how their residential properties qualify for a statutory exemption and how and by when they must appeal.

Because the DOF relies upon its current property records and ownership information, some recipients of these notice letters may have been incorrectly identified. It is important to note that a property owner can have only one primary residence, so even an owner with two properties in New York City may still be subject to the PAT Tax for one property or both (even though the proponents of the legislation claim that the impetus behind the creation of the tax was to impose a surcharge on parties who do not otherwise pay New York City income tax). The DOF is currently using the most recently filed state or federal income tax returns to identify the covered owner's permanent home address (or where the covered owner received a tax credit under the School Tax Relief (STAR) credit program) or the covered owner who received a real property tax exemption for the covered property for the prior fiscal year.

For fiscal years beginning on or after July 1, 2027, the DOF may look beyond this information when determining a covered owner's primary residence status with the DOF issuing notices by February 15 of the preceding fiscal year (e.g., February 15, 2027, for the 2028 fiscal year end), which shall include the applicable PAT surcharge. For the 2026-2027 fiscal year, the DOF must have issued notices by mail no later than August 30, 2026; future notices may be sent electronically if the DOF has a covered property owner's email address and communicating as such "would be practical and feasible." It is important to note that "[f]ailure by the [DOF] to provide this notice shall not affect the validity of the imposition of the surcharge."

Generally, the PAT Tax should not apply, and an exemption should apply, if a residential property is used as the primary residence by any of the following: 1) the property owner who is an individual, 2) an "immediate family member" of the property owner (who is an individual), 3) a tenant or subtenant under a bona fide arm's-length lease agreement of at least one year, 4) a trust beneficiary or beneficiaries if the property is owned by a trust and used by the trust's sole beneficiary or beneficiaries (without considering contingent remaindermen), and 5) the holder or holders of a collective majority ownership interest in an LLC, corporation or partnership owning the property.

The DOF's Final Rules further clarified the following:

• Immediate Family Members. An "immediate family member," as defined under NYC Admin. Code Section 11-3201, means only the spouse, child, sibling, parent, grandparent or grandchild of a covered owner who is a natural person, and this list is exhaustive. Therefore, nieces, nephews, aunts, uncles, cousins and in-laws do not qualify. Furthermore, this "immediate family member" exception does not supersede the ownership requirements applicable to trusts and business entities.
• Trusts. Only the trust's current beneficial interests are considered when determining whether an individual qualifies as a covered owner as the sole beneficiary or beneficiaries of the trust. Future, contingent or remainder interests are disregarded. However, family members of trust beneficiaries are not considered as permissible covered owners.
• Business Entities. A covered owner includes the shareholders, partners or members holding a majority interest in the corporation, partnership or LLC that owns the covered property. For purposes of determining whether a person is a "covered owner," a property or shares of stock are deemed "held" by such entity if the entity has an undivided fee interest in the property or holds all of the shares. Furthermore, the ownership interests may be aggregated among such parties for purposes of determining whether they meet the majority ownership element. For a corporation, a majority ownership is deemed to be more than 50 percent of the total combined voting power or total fair market value of all stock classes and, for a partnership or an LLC, more than 50 percent of its capital or profits. Furthermore, only one entity may exist between the covered owner who is an individual and the residential property; stacked entities, such as a corporation owning an LLC that holds the residential property as one of its assets, will not likely be exempt from the PAT Tax, even if a covered owner is the sole shareholder of the corporation.
• Arm's-Length Transaction. A property may be leased for a period not less than one year under a bona fide arm's-length transaction to the tenant (or subtenant) who claims the covered property as his or her primary residence. The "arm's-length transaction" is a lease or sublease that must 1) be entered into in good faith and for valuable consideration reflecting the fair market rental value, 2) be between willing and informed parties, and 3) not be structured primarily to avoid the surcharge.

Review of Some Common Scenarios

Example 1A – Florida Resident with a Second New York City Property: PAT Surcharge Applies

Matthew retained his Manhattan condominium after permanently relocating to Naples, Florida, and establishing his domicile in the state. Though he regularly visits New York and stays in his condominium, he spends more than 183 days in Florida, files his tax returns as a Florida resident and retains a Florida driver's license. He has not previously had any tenants with a lease longer than a few weeks. Matthew's condominium would be subject to the PAT surcharge if it exceeds the $1 million valuation threshold for 2026-2027 fiscal year.

Example 1B –New York City Property Owned by Florida Resident with Adult Child Using It as Her Primary Residence: PAT Surcharge Exemption

Matthew owns the same Manhattan condominium; however, since June 2025, his adult daughter, Linda, has resided in the property as her primary residence, claiming it on her New York state and New York City resident income tax returns. Matthew should use these tax returns in responding to his PAT surcharge notice to demonstrate that he qualifies for an exemption because Linda is an immediate family member who claims the condominium as her primary residence.¹

Example 2A – New York City Resident Owns Property in Revocable Trust: PAT Surcharge Exemption

Susan established a Revocable Trust for which she serves as the settlor and sole primary beneficiary during her lifetime with her son, Jacob, as the current trustee. Susan's Revocable Trust owns the Manhattan condominium that Susan claims as her primary residence. Because Susan is the sole current beneficiary of the Revocable Trust and the remainder interests are ignored for purposes of the PAT Tax, this condominium is exempt from the PAT Tax.

Example 2B – Revocable Trust Has Multiple Current Beneficiaries: PAT Surcharge Applies

Instead, if in addition to Susan, all of Susan's descendants are permissible current beneficiaries of Susan's Revocable Trust and her adult daughter, Megan, lives and works in Denver, the PAT Tax surcharge may apply to the Manhattan condominium because not all of the trust's current beneficiaries claim the property as their primary residence.

Example 2C – Revocable Trust Holds Property in Separate Subtrust: PAT Surcharge Exemption

If Susan continues to claim the Manhattan condominium as her primary residence and, in December 2026, if Jacob, as the trustee of Susan's Revocable Trust, exercises his discretion to distribute the condominium to a subtrust for the sole benefit of Susan created under the Revocable Trust, the condominium should be exempt from the PAT Tax beginning for the 2027-2028 fiscal year.

Example 3A – LLC Holds Property with No Majority Owner Using It as the Primary Residence: PAT Surcharge Applies

Bob, Michael and Joe are siblings who hold equal interests in an LLC that owns a New York City two-family home. Joe claims the home as his primary residence. Because Joe holds only a one-third interest in the LLC, rather than a majority interest, the PAT surcharge tax applies to the property.

Example 3B – LLC Holds Property with Majority Owners in the Aggregate Using It as the Primary Residence: PAT Surcharge Exemption

Instead, if both Michael and Joe use the home as their primary residences, because they own two-thirds of the LLC interests, they may aggregate their ownership interests to qualify for a PAT Tax exemption, even though neither of them alone has a sufficient interest.

Example 3C – LLC Holds Property and Majority Owners' Mother Uses as Primary Residence: PAT Surcharge Exemption

If neither Joe nor Michael nor Bob claims the home as his primary residence but Linda, the mother of Joe, Michael and Bob, claims the home as her primary residence, the home should be exempt from the PAT Tax because Linda is an immediate family member of the individuals who own a majority interest in the LLC.

Example 3D – Property Held by LLC and Individual Claiming Primary Residence: PAT Surcharge Exemption

If Joe, Michael and Bob agree to distribute a 1 percent tenants-in-common interest in the home from the LLC to Joe and Joe claims the home as his primary residence, even if his ownership interest in the LLC decreases because of the capital distribution to him, the property may qualify for an exemption from the PAT Tax.

Example 4A – Property Held by LLC Owned by Revocable Trust: PAT Surcharge Applies

Charles owns and lives in a New York City condominium as his primary residence. For privacy protection, Charles transfers his ownership interest to a single-member LLC, then assigns his LLC interest to his Revocable Trust of which he is the sole current beneficiary. The condominium may not qualify for an exemption because the preamble to the DOF's final regulations states that "an individual cannot establish primary residency through a multi-tier business entity ownership structure."

Example 4B – Property Held by LLC Owned by Revocable Trust Leases Property: PAT Surcharge Exemption

Instead, if the LLC leased the New York condominium on an annual basis in an "arm's-length transaction" to Charles' niece, Gloria, the condominium would likely qualify for a PAT Tax exemption, assuming that the transaction is entered into in good faith and for valuable consideration reflecting the fair market rental value of the condominium and it was not structured primarily to avoid this surcharge.

Example 5A – Irrevocable Trust Holds Property with Non-Owner Contingent Beneficiaries: PAT Surcharge Exemption

Mary establishes an irrevocable Qualified Personal Residence Trust (QPRT) and transfers the shares in a New York City co-op, her primary residence, to this trust. Her adult children, who reside in Connecticut and New Jersey, are the contingent remaindermen of the QPRT, and Mary is the sole current beneficiary during a 10-year term. The co-op would likely qualify for a PAT Tax exemption during the QPRT term.

Example 5B – Irrevocable Trust Holds Property Used by Non-Beneficiary Without Lease: PAT Surcharge Applies

Instead, if Mary's adult daughter, Meghan, claims the co-op as her primary residence alone, even if Meghan is the sole contingent remainderman of the QPRT, because Mary is the sole current beneficiary of the QPRT, only determination of Mary's primary residence will be considered when determining whether the PAT Tax applies. Unless Meghan enters an arm's-length lease transaction with the QPRT, the co-op will not likely qualify for an exemption, and the PAT Tax will apply to the co-op.

Appeal Process

The deadline to respond to the DOF's notice was extended from September 18, 2026, to October 6, 2026. If no response is filed, the determination may become final with the DOF; however, the Tax Commission review remains available on its own schedule through March 15, 2027. Recipients of the DOF's notification letters should read them carefully, review whether the property cited is considered a property owner's primary residence or whether another exemption applies, gather any documentation that could support an exemption or correction, respond by the response or appeal deadlines, and contact their advisors to discuss how the PAT Tax applies to their circumstances. Though the DOF's final regulations indicate that a primary factor for determining a property owner's primary residence is whether the property is listed as the owner's permanent home address on a state or federal personal income tax return, the DOF may also consider, among other factors 1) whether the owner occupied the property for a majority of days in the preceding calendar year, 2) whether the owner identified the property as his or her permanent residence in other filings submitted to other New York City agencies and 3) whether the property's address appears on the owner's state-issued or voter identification cards.

Conclusion

Property owners who may be subject to the PAT Tax have a limited window to appeal the current determination before October 6, 2026, and they may wish to discuss with their advisors about whether any exemptions may apply and the necessary documentation for such appeal. Property owners may also appeal to the Tax Commission regarding the valuation of the property. For future fiscal years, property owners may consider the following actions prior to the January 5, 2027 determination date: 1) the impact of the covered owner or one or more of her immediate family members claiming the covered property as their primary residence, including domicile planning, 2) modifying existing trusts so that only the current residents are the sole beneficiaries of the trust owning the property, 3) removing certain multi-tier and multi-owner structures so that individuals may qualify as covered owners of the property and 4) renting the property in a bona fide arm's-length transaction for a period of at least one year. The final option for some property owners might be to sell the property subject to the PAT Tax.

Property owners and their advisors may also review the recent litigation challenging the initial publication of the approximately 950,000 homeowners and approximately 17,000 homeowners who received notices indicating they might owe the surcharge. Property owners should carefully review their ownership structures and any current lease agreements with their advisors to determine their potential surcharge exposure and evaluate potential next steps.

For more information or questions, please contact the authors.

Notes

¹ Note that for federal gift tax purposes, owners of residential properties that are being used by adult children should consider entering into a paid rental arrangement to avoid an argument from the IRS that such children's residency is a gift by the owner-parent. This topic is beyond the scope of this alert but worth noting for clients and their advisors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.