3 Family vs. 2 Family
We are in the process of purchasing a three family brownstone that needs a major renovation. We were planning to re-configure the house into two duplexes – an owners duplex on the ground and parlor and a rental duplex upstairs. I’m wondering, is this a wise idea? Would it be cheaper to just keep it…
We are in the process of purchasing a three family brownstone that needs a major renovation. We were planning to re-configure the house into two duplexes – an owners duplex on the ground and parlor and a rental duplex upstairs. I’m wondering, is this a wise idea?
Would it be cheaper to just keep it a three family and do an owners duplex with two floor-through apartments upstairs? Any ideas on the cost difference for taxes and mortgage? Are there other ares that we should consider?
Thanks again for the advice!
For what it is worth, I have pasted information below regarding tax classifications and assessments from the NYC Dept. of Finance.
If you are also interested in talking about options and estimates for renovating your new space, please feel free to contact Prospect Architecture (Jeremy)at jrms@prospectarchitecture.com or at our temporary number, 347.221.0341. (We will have our old number, 718.783.0348, back next week.)
Determining the Annual Assessment
While Finance estimates the market value of your property, the annual assessment is based on a formula established by City and State real property laws and is not within Finance’s discretion. For example, New York State law requires the assessed value for each tax class to be a uniform percentage of the market value, legislation sets the property tax rate each year, and the State legislature limits the amount an assessment can increase in any given year regardless of increases in market value.
Generally, Finance’s determination of your annual assessment is a three-step process:
1) State law requires that Finance assign every property to one of four tax classes.
Class 1: Includes most residential property of up to three units (such as one-, two-, and three-family homes and small stores or offices with one or two apartments attached), vacant land that is zoned for residential use, and most condominium buildings that are not more than three stories.
Class 2: Includes all other property that is primarily residential, such as cooperatives and condominiums.
Class 3: Includes property with equipment owned by a gas, telephone or electric company.
Class 4: Includes all commercial and industrial property, such as office or factory buildings.
2) State law requires that Finance assess properties in each class at the same percentage of value, called the assessment ratio.
Finance multiplies its estimated market value by the assessment ratio for the class of property to arrive at the assessed value.
Class 1: The assessment ratio for all Class 1 properties is 6 percent. For example, a one-family home that Finance estimates to be worth $100,000 would have an assessment of no more than $6,000.
Class 2, 3, & 4: The assessment ratio for all Class 2, 3, and 4 properties is 45 percent. For example, a retail store that Finance estimates to be worth $100,000 would have an assessment of no more than $45,000.
3) State law requires that Finance follow certain rules for some assessment increases.
Class 1: Finance cannot increase assessments on a property more than 6 percent each year or more than 20 percent in five years. Note: These rules may not apply if a property is newly constructed, renovated, or demolished.
Class 2: Finance cannot increase assessments on properties with fewer than 11 units more than 8 percent each year or more than 30 percent in five years. Note: These rules may not apply if a property is newly constructed, renovated, or demolished. Assessment changes for properties with more than 10 units must be phased-in over five years.
Class 3: There are no assessment limitations for Class 3 properties.
Class 4: Assessment changes on Class 4 properties must be phased-in over five years.
Tax Rates
The annual Statement of Account that Finance mailed to homeowners June 2008 was based on the 2007/2008 tax rates. The City Council and the Mayor adopted the budget for the fiscal year that started on July 1, 2008 after we sent the property tax bills. We now have the new tax rates. We will send revised bills based on these rates in December.
The new property tax rates for the 2008/09 tax year are listed in the following table:
YEAR CLASS 1 CLASS 2 CLASS 3 CLASS 4
08/09 15.605% 12.139% 11.698% 9.870%
If you plan to file the conversion at the DOB you will have to file for an Alt type I, which implies change in occupancy. Not only is this more time consuming, expensive, and intricate, but the applications make it compulsory for the building to completely comply to code. Nightmare.
If you want to live the building as a two family, then try to buy a two family only.
Also keep in mind that a three family unit will have all the meters separated (three total) so you will have two meters serving one unit, this applies to gas, water and electricity for most buildings.
Also, for resale value, if you are making an illegal conversion and thinking of removing meters, there will be written record of the illegal conversion, and the next owners may ask that the building get a cert from DOB. This will force you to open up walls and get a through inspection when you least want it.
I strongly advise againt this.
Good luck!
Yes it’s pain to change the COO but tax wise it will pay off. I’m sure you have heard stories about angry renters calling the City and telling them that the Landlord has an illegal apt. that he/she rents out.
The City takes that seriously, the reson: it is cheaper to have a 2family than 3 family house, tax wise of course.
Thinking long term-do it!
Given the necessary permits, you can reconfigure as you describe without changing the CO, and probably preferable NOT to change CO. (If you were going the other direction, from 2-family to three, a change in CO would be required.) I am pretty sure that whether 2 or 3-family, you will remain in Tax Class 1 (Tax Class is different than Building Class). If configured as 4 or more, you would move into Tax Class 2 (higher rate of taxation). Since you’re considering major renovations, you should discuss all this with your architect.
The NYT ran an article (in 2005) on how certain changes (including changes in classification) might cause the City to reassess your property for property tax purposes. Not sure what effect decreasing the apartments would have.
See http://www.nytimes.com/2005/02/20/realestate/20cov.html?_r=1&scp=8&sq=property%20tax%20harlem&st=cse&oref=slogin.
Don’t forget, you will also have to change the certificate of occupancy. I haven’t done it, but I believe it can be a headache.
I can’t give you specifics but the city views a 2 family as primarily the owners home which has a rental apartment and a 3 family as primarily a business where the owner happens to live. There are fewer building department requirements for a 2 family than a 3. Since you are planning on building an addition you will be inviting the DB into your home for inspections and they can violate you on anything they see which may be a non issue for a 2 family. As far as taxes, I know that the city’s current policy is to not raise taxes for improvements to 2 family houses even though they have the right to. 3 family houses may also fall under that policy but you need to be sure.
OTOH, it has been my experience that smaller apartments are easier to rent than large apartments and tenants stay longer in the smaller apts. Also it is unlikely that both rentals will be vacant at the same time so you don’t lose all your rental income when the apt turns over.
Thanks. I had heard that there were advantages to converting from a three family to a two, if anyone else has thoughts I would love to hear them.
To answer karo25, we are thinking of making a one story addition on the ground floor. There is more than enough FAR on the property. We are not planning on going higher with the air rights.
Thanks again!
As to the mortgage part of it, it will make no difference if you have a 2 or 3 family house. The only fee you are missing out on is the 30.00 deduction from the mortgage tax. The total tax, either 2 or 3 faily house will be based on 2.175% (residential property over 500,000)
You will also pay 1% mansion tax, since I believe that the purchase price exceeds 1 mln.
Just to get it right. Are you planning of expanding the house on the outside? Are you still on the same lot or planning to go higher with the air rights?