Current Controversies

March 2011

Current Controversies

Two recent events have complicated the job of the real estate agent even further: One, a court case surrounding the quotation of square footage in an apartment; the other, a court decision that may have a profound affect on the pied-a-terre market. Here is some insight into these events and suggestions about how we should deal with them.

Square Footage

There is a dispute taking place over 110 Livingston Street, new construction. The buyers signed a contract for a two bedroom apartment. The plan identified that the apartment had 743 square feet of space. After signing the contract the buyer went back and measured and found that there was actually only 634 feet of space in the apartment. The buyer sued seeking a reduction in price relating to the actually reduced footage as well as punitive damages. The developer, Two Trees, sought to merely give the buyer his money back but he refused.

The case is now going to court four years after it was initially filed. It is common in the law that “de minimus” differences between reported square footage and actual square footage do not warrant compensation; however, a court would be hard pressed in looking at a 15% variation as an inconsequential difference.

We should all take this case as a cautionary tale against materially misrepresenting footage. As real estate brokers we often represent the interest of the seller; however, we also have a duty of due diligence, and the mere fact that a seller advises us of a square footage figure does not mean that we are removed from responsibility if that figure ends up materially incorrect. Sure as shootin’, if a dispute occurs the real estate broker is going to lose his/her commission, and getting a judge to support our position is very unlikely.

What should you do?

1. Make sure you provide a disclaimer relating to square footage at the bottom of any point of sale material. You should have this disclaimer state that the information is subject to errors, omissions and that all footage is approximate and supplied by others. For example, on our listings on the web site, we use the following:
“All information furnished is from sources deemed reliable and is submitted subject to errors, omissions, changes, prior sale or withdrawal without notice, and to any special listing conditions. Areas and dimensions are approximate.”
2. Avoid talking about square footage unless you can verify the figure independently. Rather, it is appropriate to use the square footage in selected rooms such as the living room and dining room which you can verify. You also might consider expressing “usable footage,” which is the interior dimensions of all rooms added together.
3. In describing gross square footage identify the apartment as being in a certain class of apartments. For example is an “It’s an 1800-square-foot-class 3 bedroom. “
4. Make sure you tell the buyer that you have not verified the footage but that it has been merely reported to you.

Potential Tax Implications for Part-Time Residents

In New York State, full-time residents are responsible for reporting all income from all sources and paying tax on that income to the State. However, if a taxpayer qualifies as a part-time resident, then only the income derived from business generated within the state is subject to tax.

Accordingly, under this guideline, a resident who lives and works in New Jersey and owns a home in New York will not be subject to New York State income tax as long as the residency is part-time. The guidelines offered by New York State provided a basic formula that if you resided in the state for more than 183 days (and any portion of a day is considered a full day) you are a full-time resident.

Recently a case was heard by the Tax Appeals Tribunal, which is the appeals court for the New York State tax court. The issue involved John and Laura Barker, who own a home in Connecticut. John works in New York as an investment manager and commutes. The Barkers purchased a home in the Hamptons as a vacation residence, which they use from time to time.

The New York State Tax Authorities claimed that the Barkers were considered full-time residents and that all of their income from all sources was subject to New York State Tax. The Tax court held in favor of the New York State. The judge found that the state statute defines a temporary residence as cottage or vacation home where temporary occupancy is inherent in the nature of the abode. In the present case, the home owned by the Barkers was capable of being utilized as a full-time residence and, since it was suitable for year round use, the Barkers could have used it for that purpose and they are, therefore, full-time residents under New York law.

This has created a new and potentially onerous condition providing a framework in which tax authorities can assert that anyone who owns a pied-a–terre in New York City is a full-time resident even if the property is little used.

While the Tax Appeals Tribunal expressed that the findings of this case are unique to its fact situation and the State Authorities affirmed that they did not look at this case as expressing a new policy toward part-time residency, it still is creating considerable concern among attorneys representing clients with pied-a-terre homes.

The following seem to be useful as a guideline:

1. New York State tax forms relating to part-time residents now expressly ask the customer to define the number of days they were in the state. If the taxpayer is in the state for more than 183 days then the State will assert the tax payer is a full-time resident.

2. I have been told by a number of attorneys that they intend to advise their clients who are out-of-state residents owning pied-a-terre homes in New York City that it would be prudent to place ownership of the home into a trust or corporation in order to remove personal ownership from the property. It is their contention that this provides superior protection against the risk that tax authorities might make a claim.

3. It is important that the taxpayer carefully respect the 183 day rule. A calendar or log identifying where the taxpayer was located has become an important element in proving part-time residence.

As salespeople we should consider the following:

1. A party seeking to sell a residence which is a pied-a-terre is probably highly motivated to sell as a result of the risks that are now appearing.
2. Buyers who are looking for a pied-a-terre are probably more inclined to condos than ever before in order to insulate themselves with trusts or corporations against the chance of being deemed a permanent resident.

I would strongly urge any salesperson working with a buyer who is seeking part-time residence to withhold passing an opinion on the tax implications of their purchase and encourage them to obtain professional tax advice in evaluating a proposed transaction.

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