I often got questions from families, friends and investors on how NYC property tax is calculated. The reason is that the subject is pretty convoluted and it is quite difficult to find any straightforward writings covering the topic. Here is some basic information I collected over the years along with a real example.
NYC Department of Finance calculates property taxes through a 5-step process: 1) determining property’s market value, 2) determining billable assessed value, 3) applying any exemptions, 4) applying applicable tax rate, 5) applying any abatement and savings program.
It shall be noted that any tax bills (quarterly for assessed value under $250,000 or semi-annual for assessed value over $250,000) sent to the property owners are based on market value from the year before.
Step 1: Determining property’s market value
NYC Department of Finance (DOF) assigns market value to all properties in the City based on the methodology enacted in the early 80’s. The methodology sorts all properties into four tax classes and uses different methods to develop the market value for each class. Here is a summary table.
Tax Class | Property | Market Value Method |
1 | One, two, three unit(s) residential properties | Sales comp based method |
2 | Residential properties with more than 3 units | Income based method |
3 | Utilities and special franchise properties | Cost of replacement method |
4 | Other properties, offices, hotels, factories, etc. | Income based method |
For this post, I will focus on tax class 2 properties. DOF uses the income based approach to calculate market value in this tax class. Income-producing property owners are required to disclose real property income and expense (RPIE) and file with the City annually. Using this database and statistical model, DOF will determine the rents and operating expenses on a per SF basis for each property taking into consideration a number of factors (property location, construction type and grade, year built, building size, number of story, having elevator or not, etc.). Multiplying the property’s actual gross SF by DOF’s rent and expense rate, you will get the estimated gross income and operating expenses. DOF substrates the expenses from the gross income to get the net operating income of the property. It then applies an overall capitalization rate against the NOI to derive the market value. It shall be noted that the overall capitalization rate has 2 components: base capital rate and effect tax rate, both of which are developed by DOF. The base capitalization rate is DOF's estimate of the rate of return that an ordinary investor would expect on their investment in this type of property. Effective tax rate is DOF imposed taxes due on the property. For example, if the base cap rate is 6.5% and effective tax rate is 5.5%, the overall cap rate would be 12%.
Let’s use an example to illustrate the approach on a real residential building. The hi-rise building is located in Chelsea in a C6-4X zoning district and has 266 residential units (hence a tax class 2 property) and 7 commercial units. It was built in 2003 with 36-story and 293,978 gross SF. DOF assigned rent income and expense rates of $48.93 PSF and $13.62 PSF, respectively. Multiplying the building’s actual gross SF by these rates, the gross income and expense would be $14,383,917 and $4,003,480, respectively. Hence, the property’s NOI is $10,380,437. DOF assigned a base cap rate of 6.91% and effective tax rate of 5.52% to get an overall cap rate of 12.43%. Using this cap rate and the NOI, the market value of the property is $83,511,159.
Step 2: Determining billable assessed value (with 2 cross-checkings!)
Assessed value is based on a percentage of the market value. This percentage depends on the tax class. The ratio is 6% for tax class 1 and 45% for class 2/3/4. Here are two cross-checkings that you really need to pay attention to: 1) increase limit, 2) transitional assessed value. Once all cross-checkings are complete, the outcome is called billable assessed value.
1. Increase Limit
New York State law limits how much assessed values can increase each year for certain tax classes. Property’s tax class determines the increase limits.
Tax class 1 - 6% per year, no more than 20% over 5 years
Tax class 2a, 2b, 2c - 8% per year, no more than 30% over 5 years for building with 10 or less units
2. Transitional Assessed Value
For tax class 2 and class 4 properties, DOF also calculates a transitional assessed value each year and uses whichever is lower, the assessed value or the transitional assessed value, to calculate your property tax.
Here is how to calculate transitional assessed value. DOF subtracts last year’s assessed value from current year’s and divides the difference by 5. The resulting ⅕ difference will be added to previous year’s assessed value (and each of the following four years’ assessed value) to come up with the transitional assessed value for the current year (and each of the following four years). In theory, the transitional assessed value of any given year shall consist of six (6) components as listed below. The purpose of this approach is to phase in any significant change in assessed value over a 5-year period rather than in a single year as a “shock”. Here is a graphical representation of the approach.
Year (current-1)’s assessed value
[Year (current)’s assessed value - Year (current-1)’s assessed value] / 5
[Year (current-1)’s assessed value - Year (current-2)’s assessed value] / 5
[Year (current-2)’s assessed value - Year (current-3)’s assessed value] / 5
[Year (current-3)’s assessed value - Year (current-4)’s assessed value] / 5
[Year (current-4)’s assessed value - Year (current-5)’s assessed value] / 5
Let’s continue with the example. Since the residential building falls under tax class 2, we will multiply its market value by an assessment percentage of 45% to derive its assessed value of $37,580,022. Due to the pandemic, the rental income of the property dropped and its estimated market value and assessed value were both lower. Since there is no increase on these values, we are OK with the “increase limit” cross-checking. As to the second cross-checking, its transitional assessed value of $41,333,940 (we will skip its calculation for simplicity reasons) is higher than the assessed value. Therefore, we will use the lower number, which is the assessed value, as the billable assessed value to calculate its property tax.
Step 3: Applying any exemptions to billable assessed value
DOF administers a number of benefits in the form of tax exemptions, abatements, and money-saving programs. Exemptions lower the amount of tax you owe by reducing the property’s assessed value. Abatements reduce the taxes by applying credits to the amount of taxes you owe, which we will discuss in Step 5. Some typical exemptions include 421a, J-51, veteran, senior citizen rent increase or homeowner, disabed rent increase or homeowner, disabled crime victim and good samaritan, clergy, etc. You can find more details on the exemptions here. Billable assessed value after applying applicable exemptions is called taxable value.
Continue with our example. The building receives tax exemption from the 421a program, which offers an exemption value of $20,510,406. Subtracting the exemption value from the billable assessed value, you will get the taxable value of $17,069,544.
Step 4: Applying tax rate to taxable value
The tax rate is based on tax class. Here are the tax rates for the current tax year. These rates vary from year to year but not a lot. For financial modeling which I discussed in an earlier post (in Step 4), I typically use a 1-1.5% annual increase assumption. Tax rates from previous years can be found here. Property taxes are the primary revenue source for the City. Tax rates are often adjusted in an effort to balance the City’s budget. That’s why the tax rates will not be finalized until the second half of each year (since the city’s fiscal year starts on July 1). Class 1 - 21.045%
Class 2 - 12.267%
Class 3 - 12.826%
Class 4 - 10.694%
Since the residential building in our example falls under tax class 2, we will use 12.267%. Multiplying taxable value by the class 2 tax rate, you will get tax before abatement of $2,093,920.
Step 5: Applying any abatement and savings program
Once applicable tax rate is applied to the taxable value, you will get the tax before abatement. As discussed in step 3, DOF administers a number of benefits in the form of tax exemptions, abatements, and money-saving programs. Some typical abatements include school tax relief, coop/condo abatement, green roof, solar roof, major capital improvements, etc. Once all applicable abatements are applied, you can finally get the annual property tax.
In our example, the building does not have any abatement or savings program. Therefore, its annual property tax for next year would be $2,093,920.
What if you live in a co-op or condo building?
Co-op property is owned by a corporation, where the shareholders (residents) of the corporation have a proprietary right to occupy an apartment or other space in the building. Each apartment has an assigned number of shares that are based on the size of the unit. After DOF sends the annual Notice of Property Value (NOPV) with estimated tax to each building on 1/15 of every year, the co-op board will divide the tax amount by the total shares of the corporation and will send a notice to each shareholder with this per share tax amount. The shareholder can then calculate the apartment’s tax amount by multiplying the per share amount by the number of shares assigned to their unit. Condo buildings use a similar approach with the actual SF of the unit instead of shares.
What if you want to challenge your tax bill
Once building owners (tax class 2/3/4) receive the NOPV in January, they have until March 1st to decide if they want to challenge the assessed value. You can find more information on challenging your assessment here. I highly recommend the owners to engage a specialized tax certiorari attorney. Marcus & Pollack is probably the best attorney for tax review and litigation in the city.
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