The Original Tax Shelter


New York City is the indisputable hub of American capitalism. Its glittering streets are home to the worlds of finance, advertising, fashion, publishing, and even organized crime. The island of Manhattan is home to some of the richest people on the planet, many of whom own some of the priciest real estate in the world. With so many of the affluent living on such a small piece of land, one might think that their tax collectors remain more than satisfied. However, even with the oceans of money sloshing ashore, so much of it is managing to bypass some of the most obvious tax tollbooths.  

A generation ago, New York's bold-faced names dreamed of living in the "Good Buildings"— a triangle of 42 limestone penthouses centered on Manhattan's Upper East Side. Today’s wealthiest have more than enough cash to afford those buildings. However, the modern-day rich and famous are now turning their gazes to "Billionaire's Row" — a stretch of tall, luxurious condominiums lying along 57th Street.  

This past January, one mystery buyer made real estate history by purchasing one of these condos for $100,471,452 and 77 cents. This individual is now in possession of 11,000 square feet, which includes an expansive view of Central Park, as well as room service from one of the world’s top chefs. But it's not like the place is special or anything. Just down the street, two different sets of developers are asking anywhere from $100 to $130 million for their up-and-coming penthouses.  

Looking at these numbers, one might wonder why New York tax collectors could be so unhappy. But, the answer can be found in a dense provision of New York State law, Section 421-a. This provision slashes property taxes for new construction by up to 95% for up to 25 years — if developers agree to also build homes for low-income tenants. In the case of that $100 million sale, the tax break could amount to $360,000 per year, resulting in a cost of $1 billion to taxpayers over the course of a year.  

So, why would New York pass such an absurd provision in the first place? It seems the original intention was to lure wealthy residents to the community in order to boost the local economy. But it turns out the average billionaire owns 10 residences — and if you've got 10 places to live, how much time do you spend at any one location? Foreign buyers, especially, are using their New York City pads as glass-and-concrete Swiss bank accounts rather than homes. One study found that 30% of all apartments in some of the wealthiest Manhattan neighborhoods are vacant at least 10 months out of the year.  

Lawmakers have naturally reacted with plans to make up the taxes they're leaving on the table. Some have proposed eliminating Section 421-a entirely; others have called for nonresident taxes on empty apartments. Unfortunately, the heads of the New York State Assembly and Senate are both under indictment right now, bringing all pending legislature to a halt. In fact, part of the case against Senate Leader Dean Skelos involves accusations that he voted to give 421-a breaks to a developer in exchange for employing his son. It looks like we shouldn't expect the law to change anytime soon.