Counting down the seconds

As you work on your tan poolside in Palm Beach or Jackson Hole, you may notice a twitching New Yorker next to you. If you ask him what he’s up to, he might well reply, “counting days.”

Counting days? Is he some sort of prisoner? In a sense, yes, because the transient property-owning rich are increasingly worried about proving to one authority or another that they can justifiably claim residence in a low-tax jurisdiction. And the US states, as well as the federal government, are increasingly aggressive in their pursuit of itinerant money.

Part-time New Yorkers are probably the most intensively hunted. Last year a State of New York Tax Appeals Tribunal decision against a couple, John and Laura Barker, who thought they were residents of lower-taxed Connecticut, spooked potential second-home buyers in the Hamptons. Jerry Feeney, a New York-based property lawyer, says: “There are people who don’t dare buy a second home here because they now have to start counting days.”

These “days” are those when any part of a potential taxpayer’s anatomy touches a US state for even a minute. The usual limit to claim non-residency is 182 days, or just under six months. In New York State, the limit for non-resident status is 183 days. (Please do not take this, or anything else published in the Financial Times, as tax advice. It’s just reporting and commentary; if you rely on it for your tax planning, you’re on your own.)

State and city income taxes can be very significant. In New York state the top rate, on annual taxable income over $500,000, is 8.97 per cent, and New York City residents will owe another 3.876 per cent. Some states, such as Florida, Washington and Wyoming, have no income tax. Most have lower rates than New York’s. (California and Rhode Island are up there as well.)

Once a state has decided you are a taxable resident, getting off the tax rolls is a serious challenge. The burden of proof of residence is on the taxpayer, not the state authorities.

The US federal government has its own criteria to determine whether frequent or long-term, non-immigrant visitors are subject to its tax rates. Any non-resident property buyer should be aware of these rules, and, if they visit the US at all frequently, actively manage their potential exposure by counting days.

The Feds use a formula called the Substantial Presence Test to decide whether a non-citizen, non-immigrant will have the opportunity to help close the fiscal deficit. The SPT says that a foreign national becomes a resident for tax purposes if they have 31 days of presence – even an hour spent changing planes could put you over the limit – in the US in the then-current year, and a total of 183 days in the US for a three-year period. “Days” in that context means 100 per cent of the days in the current year, one-third for the preceding year, and one-sixth for the second preceding year.

Is that clear? Probably not, which means that if you are buying property in the US, have substantial income, and plan to come frequently, you should have a tax lawyer and accountant at hand. Properties in Manhattan can look inexpensive relative to comparable areas in London or Paris, but might not be if you fall into the US tax net.

Unlike the UK authorities, neither the state nor the federal authorities are concerned that they may be driving away potential high spenders. The US’s attraction for immigrants and visitors is taken as a given, however burdensome the border inspections and tax policies.

Typically, the problem of ensuring non-resident status falls not on the hyper-mobile oligarch, but on the highly paid professional or corporate executive anchored, however temporarily, by work obligations. That tells us the range of property values that is likely to be depressed by the avoidance of the residency-shy. Properties priced above $10m, particularly second, third, or fourth homes, float above this consideration. Below that level, say a $5m or $7m hovel, you are getting into the area where prospective buyers earn enough to attract the attention of tax auditors but not enough to afford a jet charter most weekends. That level of taxpayer is also likely to be an employee and won’t have the freedom to constantly flit from one world city or watering hole to another.

There is one interesting loophole for the non-resident oligarch, or even mini-garch. Students, an occupation that can be liberally defined, and “exchange visitors” wired in to some foundation, school, or non-profit entity, do not have to count days, either at a US state or federal level.

The first five years of “US presence” for students is a once-in-a-lifetime exemption from residency tests, and “exchange visitors” have an exemption of two years within a six-year period, not counting the then-current year. So Russian oligarchs who buy eight-figure Manhattan penthouses frequently purchase them in the name of a child with student status. Studious Chinese red princes and princesses are also frequently used by their families as nominal owners. Usually, though, even very rich Chinese families are only in the market for smaller, more discreet US residential properties.

So New York, Hamptons, or San Francisco properties can be attractively priced, relative to London or Cap d’Antibes. Just remember to check that they come with hot and cold running accountants.

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