Senate Bill S3060E introduced in the New York state legislature would dramatically increase the transfer tax on fix-and-flip residential property.
The New York state legislature is trying to pass a law to dramatically increase the transfer tax on certain family properties sold within two years of original acquisition in New York City. (Note: For certain changes to the city’s administrative code, the change must come from state legislation, not directly from the city.)
We’re not talking a quarter-point increase. We’re not talking a whole point increase. This is a 15- to 20-point increase in the transfer tax!
This means that when you go to sell your property, you will pay the city of New York an extra tax equal to 15% to 20% of the sale price of the property—15% if the property is resold within two years of purchase and 20% if sold within one year.
Differing Agendas
Why would they do this?
The answer is not straightforward, and the proposed law hints at differing agendas that are largely conflicting. The city is rightly concerned about an affordable housing crisis. The data show that rents are rising much faster than incomes, causing more of the family dollar to be spent on housing. Additionally, there is less total housing available, driving up the demand for what is available, which in turn drives up the rent.
- So, there is a problem. What is the solution?
According to certain New York state legislators, the solution is to tax the very people who are in the very business suited to address the problem. The purpose of the legislation, called the New York State Small Home Anti-Speculation Act, is to “deter property speculation and flipping in vulnerable neighborhoods.”
Given this, one would think that our political leadership understands property flipping to be the main culprit. The data, however, do not bear this out. The city’s own analysis shows that one of the main reasons rents are rising is due to the current housing stock no longer falling under the requirements of rent stabilization regulations. The causes behind this trend have almost nothing to do with the flipping of rehabbed properties but instead to high-rent vacancy deregulation.
Another substantial factor is the lack of total housing stock, including preserved existing units, in the affordable range for lower income households. Thousands of additional units of housing are left vacant due to dilapidated conditions unsuitable for habitation. It is these units, already existing, that the city already has its eye on for reuse for housing.
What our legislators are currently attacking, then, is our industry’s ability to assist in solving the problem. Our industry is uniquely poised to invest, lend and build our way to increased housing stock by reactivating and reusing existing structures to house those of lower income.
Disincentives
Yet the proposed law aims to disincentivize the exact action needed to address the problem. While the proposed law makes an exception for “new housing,” this is limited to actual new construction, not the reuse of a currently vacant unit.
Legislators seem to assume that every flip of a rental property results in an increase in rent. Although that is largely true, what they fail to realize is that when the previous rent was precisely zero due to a vacant unit or building, any reuse would necessarily result in a dramatic increase in rent. Comparatively speaking, however, with rental comparables in the neighborhood, the rent may not be out outside the normal range.
What is needed is not a disincentive, but a properly organized incentive. If legislators feel that not enough affordable housing is available for lower income individuals, then the answer is to provide incentives to invest in the types of properties and in the neighborhoods that need the most help.
Existing properties in more severe states of disrepair, those in higher crime neighborhoods, those with poorer access to transit, or those that have any number of other negative attributes often need the highest amount of investment and are less likely to generate the return needed to accept the investment risk. Therefore, incentives—in whatever form—are needed to close the gap in funding or risk that has prevented these properties from being reused and populated by those in need of affordable housing.
Unintended Consequences
Would you invest in a property to flip in New York City if you had to pay up to 20% of its sale price as a tax? Most often, the answer is “no.”
The tax substantially erodes the return on investment, if not outright strips it away completely. Even for those with higher ROIs to begin with, the tax will lower it enough to make most projects not worth the effort. Ironically, this tax may end up pushing investors toward the higher end of the market where the increased costs to the ultimate consumer could be borne effectively, further reducing the affordable housing stock for lower income households.
The proposed law also has other unintended negative consequences. The new proposed tax is in addition to the current tax imposed on the transfer of properties, and the city generates revenue from this base tax. With the imposition of the new tax, there will be an overall reduction in the amount of property transfers within the city, thus reducing the revenue generated by the base tax and negatively impacting the city’s ability to fund its efforts to address the affordable housing crisis.
Remember, this bill does not just affect the direct investors in these properties. If the investor stops investing, then the investor stops borrowing from the lender. The investor stops hiring attorneys. The investor stops hiring contractors. The investor stops hiring agents. You get the picture—jobs will be lost.
The Good News
What’s the good news in any of this?
We still have time to stop this from happening. As you may be aware, AAPL and its membership was instrumental in defeating a bill in Florida last year that would have required licensing for those engaged in business-purpose loans within the state. This was accomplished by discussions with legislators; testimony in committees; and letter-writing campaigns, phone calls and emails by our membership.
AAPL’s Government Relations Committee is leading the charge against this transfer tax bill, adopting as many of the great lessons learned from the campaign against the Florida licensing bill. We are scheduling upcoming meetings with the legislator-sponsors of this bill to discuss its disastrous impact. We have created a petition for our membership to sign and to pass around to all others affected by this bill. We have created draft letters for our membership to send to the legislator-sponsors (or any other New York legislator) telling them how you understand the severe negative impact this bill would have upon you, your livelihood and those living within the City of New York.
What can you do to help? Sign the petition, send letters, call and email your legislators in New York, especially those who sponsored this bill. Legislators do listen, but only if you are loud enough.
The issue of affordable housing isn’t going away any time soon. This is a very real and important problem to solve. Let’s be that solution. It would be advantageous to present to the legislators not only a chorus of “no’s,” but to propose alternatives. What we need is you, our endlessly creative membership, to propose legislative solutions to address affordable housing that would be an alternative to this devastating tax.
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