Tax Implications of Owning a Second Home
By: Karen Tenenbaum, Esq., Tenenbaum Law, P.C.
Have a second home? Watch out for the tax man.
You’re living the good life with an apartment in Manhattan and a vacation house in the Hamptons. Or maybe you’re a snowbird spending half your time in New York and the other ha
lf in Florida. Second homes offer convenience and luxury. Unfortunately, they can also cause significant tax problems if you don’t know the rules.
If you have a primary residence outside of New York State, but also own or use residential property in New York State, you may be subject to a New York residency audit. The same is also true if you have a home within New York City and another outside NYC. And residency audits can result in significant tax liability.
New York taxes are high, which makes the consequences of an audit even worse. If you are found to be a New York State resident, you must pay State income tax on all income, regardless of where it is earned. Nonresidents pay tax to New York State on only New York State source income.
Many people deliberately move out of the state in order to avoid these high taxes. However, moving out of state may not be enough. The issue of whether or not you are a New York resident for income tax purposes is complex. Even though you may reside outside New York most of the time and only have a second home in New York, you could still be considered a New York resident and be taxed accordingly.
There are 2 tests for residency and the key points to remember:
- Where is your domicile – the one place you intend to have as your permanent home?
Let’s say you have a beautiful home in Connecticut, but you work in New York City and so you have an apartment there for convenience to stay in during the week. Which residence is your domicile – the one place you intend to have as your permanent home? Auditors will look at a number of factors to determine your domicile. They will want to know information such as: What is the use, maintenance, value, and size of the New York State home as compared to that of the non-New York State home? Where do you conduct your business activities? Where is your family residing? Where do you keep special items (photos, jewelry, pets, etc.)? How much time do you spend in New York as compared to your out of state residences? Other factors like where you have a driver’s license, register to vote and have bank accounts, won’t help you, but can be held against you. Remember even if you do not spend significant time in the State, New York can still be considered your domicile.
- If your domicile is not in New York, do you maintain a permanent place of abode and spend more than 183 days of the year in New York?
You retired and moved to Florida, but your family is still in New York and so you kept your house here so you can visit frequently. Are you a New York resident for income tax purposes? New York defines a permanent place of abode as a residence (building or structure in which a person can live) that is maintained by the taxpayer and is suitable for year-round use. Even if others are using the place (relatives, renters, etc.), it could still be considered your abode under certain circumstances. For example, buying an apartment for your child could cause a residency audit if not handled appropriately.
What matters to auditors is whether you have unfettered access to the place, that it’s suitable for use year-around, and it is habitable and being maintained for more than 11 months of the year.
When it comes to counting the number of days you spent in New York, generally the rule is that a partial day counts as a full day, with some limited travel and medical exceptions. So if you’ve just come to New York for a few hours for a business meeting or to go to dinner and attend a Broadway show with friends, that counts as a full day.
- Do you have documentation to prove your case?
A residency audit is very document intensive and personally invasive. You have the burden to prove your whereabouts. This means you must prove a negative: that you were not in New York. And auditors can look at your appointment calendars, credit cards, passports, phone bills, smart phone applications that track and record your location and other documents to determine whether you have met either of the tests for NY residency.
Unfortunately, if you’re not careful, you can lose out on some of the benefits of your second home. If you’ve received a NY residency questionnaire or are being audited, there are a number of options available for resolving your tax dispute.