How The Purchase Of A $260,000 Home Created A $2 Million State Tax Bill: Recent New York Case Serves As A Stark Reminder Of The Need For State Tax Planning Before Buying A Second Home


by Matt Ottemann

Ottemann, Matthew
mottemann@mcgrathnorth.com
(402) 341-3070

Background: A Second Home In The Hamptons

John and Laura Barker are a well-to-do couple living in the affluent suburb of New Canaan, Connecticut. They married in 1993 and have three children. John is an investment manager for Neuberger Berman in New York City and works five long days per week. He typically leaves his house at 6:00 am for a long commute to New York City and does not return until after 7:00 pm.

While seeking a summer rental in the Hamptons on Long Island in 1997, the couple found out that most summer rentals were costly and required an entire monthly commitment. So, when Laura’s mother informed the couple of a property in Napeague, New York for purchase, they strongly considered the idea. Ultimately, they decided to purchase the home for $260,000 to use for occasional family vacations. The home was relatively small (1122 square feet), but was close to the ocean, so the Barkers were pleased with the price.

The Barkers’ use of the home was sporadic – typically between 14-18 days per year. However, Laura’s parents made frequent use of the property – several days a week during the summer months and on many weekends during the rest of the year. So pervasive was the use of the home by Laura’s parents that the Barkers would often call the parents before planning a stay in order to be sure there was no conflict with visits.

At Issue: Whether The Barkers Were Residents Of New York For Tax Purposes. New York’s Rules On Residency Are Similar To Nebraska’s Rules.

At issue in this case was whether the Barkers were “residents” of New York for tax purposes. If so, this would mean that all of their income would be subject to New York state income tax. New York’s tax rules on residency are functionally the same as Nebraska, in that persons can be residents for state income tax purposes in two ways:

1. They are domiciliaries of New York. This means that they consider New York to be their domicile or permanent place of residence. For example, the act of registering to vote in a state, registering cars in a state, or obtaining a driver’s license from a state are indicative of a person’s state of domicile.

2. They maintain a permanent place of abode in New York and spend an aggregate of 183 days or more in New York.

The New York Division of Taxation claimed that the purchase of a summer home by the Barkers caused them to fall into this second category. This is because Mr. Barker commuted daily into New York City for his work and because the Barkers’ vacation home constituted a “permanent place of abode.”

In a recent decision, the New York Tax Appeals Tribunal agreed with the State. The Tribunal ruled that the Barkers’ dwelling was a “permanent place of abode” because the “residence is objectively suitable for year round living and the taxpayer maintains dominion and control over the dwelling.” The Tribunal further stated that there was “no requirement that the petitioner actually dwell in the abode, but simply that he maintain it.”

This decision meant that the Barkers’ entire taxable income from the date their second home was purchased was subject to New York state taxes (in addition to Connecticut state taxes)– a bill of approximately $2 million dollars, including taxes, interest, and penalties. This was a terrible tax result for this couple who simply wanted a small vacation home to use for a few weeks in total per year.

How Does This Affect Me?

While the result in this case is particular to the Barkers, it should serve as a lesson for all taxpayers who own, or intend to own, homes in multiple states. You should engage an experienced tax professional to ensure that your second home will not cause you to be a resident of multiple states for tax purposes. If so, you could owe resident state income tax to more than one state. Over a period of years, this tax bill (with interest and penalties) could be significant.

The McGrath North Tax Group has experience in reviewing the state tax consequences for both persons who live in one state and work in another and persons who own vacation homes in states other than Nebraska. We would be happy to help you review your individual situation – so you may understand the tax consequences of owning property or living in more than one state. In this case, you don’t want to keep up with the Barkers.

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