Another Step in New York State's Incremental Suicide

It's death by a thousand cuts...or a thousand taxes... for New York State:

A New York court ruled last month that all income earned by a New Canaan, Conn., couple is subject to New York state taxes because they own a summer home on Long Island they used only a few times a year. They have been hit with an additional tax bill of $1.06 million.

Tax experts and real estate brokers say this ruling could boost the tax bill for thousands of business executives who own New York City apartments they use only occasionally. It could also hurt sales in the Hamptons and New York's other vacation-home communities.

"People will think twice about spending any summer time in New York," says Robert Willens, a New York-based tax consultant. "The amount of tax they could be subjected to is likely to outweigh the benefit."

A spokesman for the state Taxation Department issued a written statement that said it was "pleased" with the decision. "However, these cases are fact-intensive and as such each case stands on its own specific fact pattern," it said.

For years, New York law stated that residents of another state who spend more than 183 days a year in New York have to pay taxes on any income they make in this state. But they generally haven't had to pay New York taxes on income they make outside of the state or on their spouses' income if they work elsewhere.

Under the recent ruling, this might change for many out-of-state residents who own vacation homes or apartments here. In effect, it reinterprets what counts as a permanent residence.

In defining a "permanent place of abode," New York tax code specifically excludes "a mere camp or cottage, which is suitable and used only for vacations." New York tax experts say the new ruling is the first they recall that counts summer homes as permanent residences.

"This is going to open up a Pandora's box," says Eric Kramer, a tax attorney in Uniondale, N.Y. "I don't think anyone previously thought vacation homes would count as a permanent residence."

Many wealthy people, like Rush Limbaugh, have already sold their New York properties because of high taxes and this will simply speed up the exodus. If nothing else, people with second homes in NY State will quickly rethink whether they want the additional tax exposure. You might be able to pick up a home in the Hamptons pretty cheap before too long.

Every time New York thinks they've found a new source of tax revenue it backfires on them.

Megan McArdle at The Atlantic adds this:

...I expect a massive sell-off of second homes. New York has some of the highest tax rates in the country. No one is going to voluntarily subject themselves to such rates just for the dubious privilege of having their own apartment in New York. There are hotels for that.

But how long until they decide a week-long hotel stay requires you to pay New York income taxes too?