Illustrative example: A condominium with a DOF market value of USD4m would incur an annual Phase 1 surcharge of USD210,000 (5.25% × USD4m = USD210,000), which would be payable in addition to existing property taxes. Under Phase 2, if the comparable-sales value remains below USD5m, no surcharge would be owed; if it exceeds that threshold, the rate drops to between 0.80% and 1.30% depending on the value band.
Primary residence exemption
The most important exemption from the surcharge is the primary residence exemption because, if applicable, it eliminates the surcharge entirely. To qualify, the owner must demonstrate that the property was actually occupied as a primary residence on January 5, 2026, which is the reference date for the fiscal year running July 1, 2026 through June 30, 2027. Prior or subsequent occupancy is not sufficient; the inquiry is specific to that date.
Qualifying occupants include any one of the following:
- The property owner
- A spouse, child, sibling, parent, grandparent, or grandchild of the property owner
- A tenant or sub-tenant who rents the property on a full-time basis under a bona fide lease agreement
- The sole beneficiary (or all current beneficiaries) of a trust that owns the property
- The majority interest holder(s) of an entity that owns the property
Importantly, the primary residence exemption is not automatic. The DOF conducts an independent review for each fiscal year and, in some instances, may determine from its own records that a property qualifies for the exemption.
In all other cases, and particularly for trust and entity owned properties, the owner must affirmatively submit an exemption application supported by documentation. Exemption applications can be submitted through the DOF’s online portal or by mail; forms and instructions are available on the DOF website.
Individual property owners would be well-advised to be prepared to provide documentation such as filed federal and state income tax returns listing the property as the taxpayer’s address, a valid driver’s license or state-issued identification showing the property address, voter registration records, utility bills or statements in the owner’s name for the property, and any other documentation demonstrating occupancy as of the January 5, 2026 status date.
Trust ownership
Properties held in trust present unique complications under the surcharge regime. To claim the primary residence exemption through the trust beneficiary pathway, every current beneficiary of the trust must use the property as a primary residence. Remainder beneficiaries (those who will receive trust assets only upon the occurrence of a future event, such as the death of the current beneficiary) are disregarded until they become current beneficiaries.
The exemption application for property owned by a trust must include:
- a copy of the trust agreement identifying the sole beneficiary or beneficiaries of the trust
- an affidavit from a trustee documenting the trust’s ownership of the property and the sole beneficiary or beneficiaries of the trust
- a copy of the most recently filed federal or state tax return of the sole beneficiary or beneficiaries of the trust.
Where the trust beneficiary track fails: If any current beneficiary does not reside at the property, the trust beneficiary pathway to exemption is unavailable. However, an alternative route may exist through the immediate family member track. For instance, if the property is held in a trust for the sole benefit of one individual, and that individual’s spouse resides at the property, the exemption may be secured on the basis that the spouse is an immediate family member of the property owner.
Entity ownership
For properties held through partnerships, limited liability companies, corporations, or similar entities, the surcharge rules impose meaningful structural constraints on exemption eligibility
- Single-layer requirement: Only one entity may stand between the qualifying occupant and the property. Stacked or nested entities, for example, an LLC owned by another LLC, will generally render the exemption unavailable.
- Aggregation rules: Multiple qualifying individual occupants who each hold a portion of a majority interest in an entity may combine their interests to satisfy the majority-holder requirement. Entities, however, may not aggregate their interests with one another.
- Dual-trust ownership: Where two trusts hold a property for the benefit of the same sole beneficiary, the statutory text appears to permit the exemption, though the DOF has not yet confirmed this interpretation.
Practical takeaway: Clients who hold residential real estate through multi-tiered entity structures may wish to review those arrangements promptly to determine whether restructuring may be necessary to preserve exemption eligibility.
Death, hospitalization, and nursing home admission
The surcharge rules provide some relief when a qualifying occupant passes away, is hospitalized, or enters a nursing-home or rehabilitation facility. If the individual was using the property as a primary residence immediately before the event, the property may continue to qualify for the exemption for:
- one year following the date of death
- the duration of the hospitalization or nursing-home/rehabilitation facility stay.
Cooperative apartment owners: additional steps
Shareholders in cooperative housing corporations face a distinct procedural layer. The surcharge is assessed against the cooperative housing corporation as the legal property owner, but the individual unit owner (shareholder) is responsible for establishing exemption eligibility for the unit. Accordingly, co-op owners may wish to:
- confirm with the building’s managing agent or board of directors whether the cooperative corporation has received any DOF surcharge notice and ensure that the notice is forwarded to the affected shareholder
- file the individual unit’s exemption application, or coordinate with building management, if the cooperative corporation must participate in the process
- verify that the individual unit appears correctly on the DOF’s published addendum, which lists co-op units by street address and unit number, and coordinate with management to correct any errors.
Critical deadlines and response obligations
The most important date for property owners is October 6, 2026, which is the deadline to submit an exemption application to the DOF. Missing this deadline may result in liability for the full surcharge, even for owners who would have otherwise qualified for a complete exemption.
For fiscal year 2026–2027, the surcharge will first appear on property tax bills due January 1, 2027.
Additional timing considerations:
- 30-day appeal window: The period to contest a DOF determination begins on the date the DOF transmits the notice, not the date the owner receives it.
- Resubmission opportunity: If an initial exemption application is denied, one additional submission with supplemental documentation is permitted, but only if it is filed before the October 6 deadline. Owners who wait until the last day forfeit the ability to resubmit.
- File early: Given the resubmission rule and the possibility of technical difficulties with the DOF’s online portal, owners may wish to submit applications well in advance of the deadline.
- Document retention: It is a good idea for an owner to retain copies of all materials submitted, including the application itself and all supporting documentation.
Penalties for inaccurate submissions
The DOF is authorized to impose substantial penalties for exemption applications that contain inaccurate or misleading information, whether submitted negligently or in bad faith:
- Where a false submission would have eliminated the surcharge entirely: a penalty equal to 50% of the applicable surcharge, plus reinstatement of the full amount owed
- Where a false submission would have reduced the property’s stated valuation: a penalty equal to 300% of the surcharge difference attributable to the understated value, subject to a cap of 50% of the total surcharge
Six-year audit window: The DOF retains authority to audit any submission for up to six years after it is filed. All information provided must be accurate and supported by contemporaneous documentation.
Challenging the DOF’s determination
Owners may challenge primary-residence status or valuation through two forums; and the choice of forum has strategic implications:
Primary residence appeal to the DOF
An owner who believes the property qualifies for the primary residence exemption may file directly with the DOF within 30 days after the DOF transmits the notice. If denied, one resubmission is available before the filing deadline.
Valuation appeal to the NYC Tax Commission
An owner who believes the DOF has overstated the property’s market value may file a challenge with the New York City Tax Commission.
Strategic considerations in choosing a forum
- An owner may not pursue simultaneous challenges before both the DOF and the Tax Commission.
- If an owner files a challenge with the Tax Commission, the DOF will stop considering any pending appeal and any determination already issued by the DOF will have no effect.
- Both a primary residence challenge and a valuation challenge may be brought together before the Tax Commission, but they must be filed as part of a single proceeding.
- The choice of forum may limit available remedies and should be evaluated in consultation with counsel, particularly where both residency and valuation are at issue.
Lien risk and transactional implications
Any unpaid surcharge, together with accrued penalties and interest, constitutes a lien on the affected property. This carries direct implications for both current owners and parties to pending or contemplated transactions.
Planning considerations and recommended next steps
Clients with New York City residential property may wish to:
- Audit ownership structures. Review each property’s ownership structure to assess whether it supports exemption eligibility.
- Establish and document primary residence status. Gather contemporaneous proof of occupancy as of January 5, 2026, such as filed federal and state tax returns listing the property address, a valid driver’s license or state ID, voter registration records, utility statements, and an executed lease.
- Consider ownership restructuring. If a multi-tiered entity structure blocks the exemption, assess whether a single-entity structure is feasible and advisable in light of asset-protection, estate-planning, and tax considerations.
- Address international client considerations. Non-U.S. owners may face added difficulty proving primary-residence status and it would be prudent to engage counsel early to evaluate their options under the surcharge framework.
- Evaluate valuation challenges. If the DOF’s value appears inflated, assess whether to challenge it and select the appropriate forum, DOF or Tax Commission, based on the strategic considerations above.
- Incorporate the surcharge into transaction planning. For pending or anticipated purchases or sales of properties that may be covered, ensure contracts allocate surcharge risk and address potential retroactive DOF determinations.
- Coordinate co-op filings. Promptly confirm with building management that notices were received and the exemption filing process is underway.
- File early and retain all records. Submit exemption applications well before October 6, 2026, to preserve the right to resubmit if denied, and keep copies of all materials submitted to the DOF.
NYC property owners may wish to assess their exposure promptly, whether or not they have received a DOF notice. A&O Shearman’s Private Client Group can advise on the tax, trust, and estate-planning issues raised by the surcharge.
This alert is provided for informational purposes only and does not constitute legal advice. The content reflects the state of the law as of September 2026 and is subject to change as litigation and administrative guidance continue to develop.
