New York State Tax Department and the Second Home

Residential Real Estate Lawyer New York State Income Tax

So unless you have been on a desert island for the last week with no internet access, you have likely heard about the case involving the Connecticut couple that just lost a tax appeal to the tune of about $1 million in back taxes, interest and penalties.  The case hinged around a second home they owned in the Hamptons ,and the precedent is sending shock waves through the real estate community.

Here are the facts:

John and Laura Barker are Connecticut residents and taxpayers.  John worked in Manhattan during the time in question, commuting from their home in New Canaan.  His earnings from the New York job were subject to New York State income tax, and the couple paid this tax and never disputed it.  But their other worldwide income (from dividends and interest) were not, according to them, subject to NYS tax as they were not “resident individuals” subject to NYS income tax on their worldwide income, as opposed to just NYS generated income, which the couple paid and did not dispute.

In determining if the husband was a “resident individual” the court imposed a two part test for those “not domiciled” in New York, but nevertheless taxed as resident individuals:  (1) did he spend 183 days here, and (2) maintain a permanent place of abode in the state?  John Barker conceded point 1, he was “present” in the state for 183 days or more during each of the years in question.  What he did dispute, was maintaining a permanent place of abode in the state.  The couple did own a house in the Hamptons, but spent little time there, only a few weekends a year, and instead allowed the wife’s parents to use it primarily.

Notwithstanding their “infrequent” use of the Hamptons house, the court held against them, employing an objective test (was the residence a dwelling place permanently maintained by the taxpayers) rather than the subjective test (that the couple did not, in fact, employ the home as such).

For the couple, the result of this conclusion was an extra million dollars in taxes during the tax years in question.  For the real estate industry, the case has chilling consequences.  I know already of two deals that fell apart when this case was announced, with the buyer backing out due to their fear of being taxed as “resident individuals” and subject to millions of extra dollars in taxes.

But let’s be clear here, merely owning a second home here is not enough. It must be coupled with presence in the state for 183 days or more per year.  And if the individual has little other income besides the NYS income, then the practical effect will be minimal:  that income is already subject to NYS tax.

3 Responses

  1. Shelly Katz-Biederman says:

    Hi Jerry, a question: so the husband was in NYS 183 DAYS. Does this mean that the nights are not part of the equation? E.g., he worked in Manhattan but went home nights to CT? Was the presence of days in NYS exclusive of where the sleeping/nights were? Did the commutation part of the equation mean nothing? Hoping you understand my question.

    • Jerry Feeney says:

      Generally when you “set foot in” the state it counts as being “present” for the day. Where he slept does not enter this equation. The communtation part of this weights on where is a domiciliary, but not on whether he is a resident individual. Confusing? Yup, you can be domiciled in Connecticut and for tax pupores be a “resident individual” of NYS.

  2. Nancy Meekin says:

    So am I correct in assuming that New York will not try to tax you on income if you are domiciled in Florida and merely purchase a second home in New York State to use as a vacation home 4 or 5 months of the year, as long as you are not in the state more than 182 days, and you do not earn any income in the state? Alternately, might they try to make the case that you are domiciled in New York?

    Thank you.

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