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Yvonne Cort of Capell Barnett Matalon & Schoenfeld
A new court decision is welcome news for Hamptons real estate owners who work in New York but have their full-time residence in another state. It could mean they will no longer be subject to paying New York State income taxes on their worldwide income.
Nelson Obus, a hedge fund manager who lives in New Jersey and works in New York, brought the case, which was decided last month. The court held that his ownership of a vacation home in Fulton County, New York, did not justify New York State considering him a resident for income tax purposes.
Tax attorney Yvonne Cort , a partner at Capell Barnett Matalon & Schoenfeld LLP in Jericho, watched the case and finds the court’s decision to be major for taxpayers. She explained that New York State law provides two ways to define individuals as residents of the state: One, they are domiciled in New York, “which means this is really your home. This is where you live, it’s where your heart is.” Two, they are considered “statutory residents” because they have “a permanent place of abode” in the state for a substantial part of the tax year and they spend more than 183 days in the state annually.
In the matter of Nelson Obus, et al. v New York State Tax Appeals Tribunal et al., where Obus lives and how many days he spends in New York were not in question.
“No one disputes his home is in New Jersey,” Cort said. “He commutes to work in New York City, so no one disputes he’s in the state more than 183 days. So what it comes down to is whether his vacation home in upstate New York counts as a permanent place of abode.”
Cort said that the long-standing interpretation by the courts and the New York State Department of Finance looked at the characteristics of a permanent place of abode: Can it be used year-round? Does it have kitchen and bathing facilities? Does the occupant own and maintain it?
“Under those rules, applying that to this case, he lost at the lower level,” she said.
But Obus appealed, arguing that it’s just a vacation home and he’s only there two or three weeks a year. He doesn’t keep personal belongings there and it is a four-hour trip from his place of work.
When his case reached the New York State Supreme Court Appellate Division, Third Department, the justices annulled the tax tribunal’s determination — a victory for Obus.
“They said, let’s look at the legislative intent of the law,” Cort said. “The statutory resident law was really intended for people who were trying to evade taxes, who really were spending a lot of time in the state.”
She said what she found striking is that the justices said considering his vacation home a permanent place of abode is inconsistent with the legislative intent underlying the statute.
“It’s really a major decision in favor of the taxpayers,” Cort said, though she pointed out that the 30-day window for the state to appeal the decision is still open. “They could go up one more level and see if it gets reversed on appeal, but for now, this is really quite a remarkable case.”
Cort noted that income sourced to New York, such as a rental property in New York, is taxable for out-of-state residents. But out-of-state residents are not subject to New York State taxes on their worldwide income sourced elsewhere — which is why Obus did not want to be considered a New York resident despite working there and owning a vacation property there.
This court decision is of no benefit for people who have a place in New York City and a place in the Hamptons, Cort acknowledged. But someone who lives in Connecticut or New Jersey, owns a place in the Hamptons and also spends more than 183 days in New York State for work will likely be affected.
The 183-day rule includes any part of the day, so commuting to work in Manhattan for a few hours before going home to spend the night in Connecticut or New Jersey is still considered a day in New York State counting toward that 183-day threshold.
“That’s meticulous with that day count,” Cort said. “You have to keep track of where you are every single day of the year.”
Prior to this case being decided, a seldom-used Hamptons house could make someone who lives in another state a statutory resident of New York. “But with this case now, there’s the possibility that if they only stay there a few weeks of the year, they might not be taxed as a statutory resident,” Cort said. “It can make the difference whether someone chooses to purchase a place in the Hamptons versus rent, because if they only rent something for the summer, then they’re not going to be taxed as a statutory resident.”
She stressed that each situation is fact sensitive, so a Hamptons homeowner making the same claim that Obus did may not be successful. Using a house for more than three weeks a year, a shorter distance to the owner’s place of work and keeping personal belongings in the house could all influence the outcome.
