Bad guys from around the world are buying up the most expensive apartments in New York to launder or protect their ill-gotten fortunes and hiding that fact through mysterious shell companies. They can do this because real estate interests blocked efforts to require property transactions to have the same strict scrutiny that comes with bank accounts and other financial dealings. This is hypocritical because the U.S. is insisting that other countries change their laws so the feds can pursue people who have hidden money and avoided taxes in places like Switzerland.
That summary seems to be the bottom line of the five-part New York Times series that anyone interested in New York real estate has been dutifully devouring in the past week. Yet the implications of all this remain somewhat mysterious—especially for New York.
The series points out that the luxury apartments these bad guys own pay very little in property taxes and that the individuals probably escape the income tax, too. That’s not exactly news.
The Times itself has published many stories about how the city’s controversial 421a tax abatement program reduces taxes on the most expensive luxury condos to absurd levels. So has Crain’s. I’ve written a lot about it, too, and about how the entire system for levying property taxes is unfair and benefits owners of pricey condos. The Independent Budget Office’s work on the issue is exemplary.
The bad guys in the Times series pay no income tax because they don’t spend half the year in New York City or New York state. They probably escape federal income tax, too, because they don’t spend half the year in the country. The Times’ own James Stewart has written a series of insightful stories on this and explained how other global cities are moving to impose taxes on the global, mobile rich by broadening their definition of residency.
Of course, Americans who buy luxury condos at places like the Time Warner Center, the focus of the series, usually benefit from both tax breaks. Ownership through a shell corporation makes no difference, either. Whatever the real estate taxes are, they have to be paid by someone. The bad guys would have to pay income tax if they lived in the city long enough and generated some income here.
Except perhaps for the developers building the super-luxury towers, virtually no one believes condos like this should get 421a abatements that phase in real estate taxes over as long as 25 years. Many people support an overhaul of the property tax system, though it appears to be an impossible task politically. Broadening residency rules make sense. But none of this has anything to do with bad guys and shell companies.
In the end, the Times series may be set in New York, but tells us little about the city.