September 2003

Tax Decisions Affecting Rent-Stabilized and Rent-Controlled Tenants

By David Weinraub

Tax decisions could directly affect the rights of New York City tenants to keep their rent-stabilized or rent-controlled apartments. Often, an apartment has become a vital center of life, where the family has lived for years and raised children. For long-time tenants, the rent-stabilized or rent-controlled lease might be one of their most valuable assets, since the rental amount can be well below market rate.

There are two situations where tax decisions directly affect a tenant’s rights. The first is commonly called a “non-primary residence” proceeding and the second is a “luxury decontrol case.” In both situations, tax decisions in previous years can be critical in determining whether the tenants can stay in their home.

Non-Primary Residence Proceedings

Many individuals that attempt to reduce their New York City or New York State taxes by declaring their second home in another county or another state as their permanent home address fail to recognize that they could also be affecting the rights to their New York home.

The rent-control and rent-stabilization laws require that tenants maintain their New York City apartment as their primary residence as a condition of continued tenancy (NYC Administrative Code sections 26-401–415 and NYC Administrative Code section 25-501–520). To determine if a tenant is maintaining the New York apartment as the primary residence, the courts examine whether the tenant is maintaining an “ongoing substantial, physical nexus with the premises for actual living purposes” [Berwick Land Corp. v. Mucelli, 249 A.D. 2d 18, 671 N.Y.S. 2d 44 (1st Dep’t 1998)].

In judging whether a tenant is maintaining an apartment as a primary residence, the court relies, in large part, on the address the tenant uses for legal documents [see 72A Realty Associates v. Czeresnia, N.Y.L.J. Feb 2, 1995, p. 27 Col 5 (App. Term 1st Dep’t)]. These documents include a driver’s license, tax returns, voter registration, car insurance and registration, as well as many other documents that help establish a person’s primary home. The courts place special emphasis on whether the tenant pays New York City income taxes and whether the tenant lists the New York City address or another domicile on the state tax return. Thus, when tenants decide to declare another address as a permanent residence, or when tenants decide not to pay New York City residence taxes, the court may consider such a choice as a formal declaration that the alternate address is the primary residence. Such individuals risk an extremely expensive and lengthy eviction proceedings, in which they could lose their home.

Luxury Decontrol

A second ground for an owner to terminate a tenant’s lease is commonly called “luxury decontrol” and is based upon both the tenant’s income and the legal regulated rent of the apartment. Tax planning can help a tenant keep income lower than the threshold amount, enabling the tenant to keep the home. Rent-stabilization and rent-control laws give a tenant the right to continued occupancy, even after a lease has expired. A tenancy can be terminated or deregulated only under specific enumerated circumstances, one of which is called high-income rent decontrol.

The 1997 Rent Regulation Reform Act provided that when a tenant’s income is in excess of $175,000 for two successive years and where the apartment’s rent is $2,000 or more per month, the apartment will be declared exempt from rent control or rent stabilization.

A tenant’s income is based upon the total income of all persons listed on the lease or occupying the apartment as their primary residence on other than a temporary basis. Annual income is based upon the federal adjusted gross income as reported on line 18 of the New York State Income Tax return (see Rent Stabilization Law section 26-504.3). The combined income, however, must be over the $175,000 threshold for two successive years in order to trigger deregulation, which leads to the rent jumping to the current market rate. The subsequent jump to market rate rent can be ten times as much as the controlled or stabilized rent.

Thus, whenever a rent-regulated tenant’s household income is greater than $175,000 in any one calendar year, the tenant’s rent level must be carefully considered. If the rent is greater than $2,000 per month and if the tenant’s income is greater than $175,000 for a second consecutive year, the apartment rent will be deregulated. To the extent that annual earnings can be controlled, tax and income planning to keep the tenant’s income lower than the threshold amount in consecutive years becomes extremely important. The timing of discretionary transactions, such as the sale of stocks or the redemption of bonds, becomes critical.

David Weinraub, JD, is a partner in Grad & Weinraub, LLP, New York, N.Y.

Mark H. Levin, CPA
H.J. Behrman & Company LLP

Contributing Editors:
Henry Goldwasser, CPA
Weiser LLP

Neil H. Tipograph
Imowitz Koenig & Co., LLP

Warren Weinstock, CPA
Marks Paneth & Shron, LLP

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