Tax exemption urged for LI vacation homes

East End politicians are trying to limit a law that allows New York State to collect full income taxes from people who live permanently elsewhere but work and own vacation homes here.

The law requires out-of-state residents with jobs in New York to pay tax on all of their income -- including dividends, capital gains and other earnings beyond wages -- if they spend more than 183 days a year anywhere in the state, regardless of what they are doing.

They also must own a second home in New York. However, the statute, which dates from the 1920s, doesn't specify the type of home, though some interpretations have excluded camps, cottages and other vacation housing. 

Legislation proposed
State Sen. Kenneth LaValle (R-Port Jefferson) and Assemb. Fred Thiele Jr. (I-Sag Harbor) have proposed legislation that would exempt these people from taxation on income earned outside New York if the second home is more than 50 miles from work and they spend 90 days or less there per year. The bill is in response to a recent tax case that local business leaders fear could spark an exodus of vacation-home owners who are seen as crucial to the East End economy.

The case involves a Manhattan investment executive and his wife, both Connecticut residents, who have a second home in Napeague. In January, a New York State tax appeals tribunal said the couple were New Yorkers because their Osprey Road house is habitable year-round, even though they spend only a few days there each summer. The pair is facing more than $1 million in back taxes, interest and penalties on income earned outside the state.

"The legislature never intended to touch people with vacation homes. . . . This is an issue of fairness for the taxpayer," Thiele said, noting the couple also pays full taxes in Connecticut. "But this is also about the impact on the East End economy. The second-home industry supports many local jobs." 

Tug-of-war over taxes
Thiele and LaValle said that the livelihoods of contractors, landscapers, restaurateurs and others depend on vacation-home owners and that these owners pay property taxes to support public schools but rarely use them or other government services.

Peter M. Turino, president of the real estate firm Brown Harris Stevens of the Hamptons, said, "No one from out of state is going to buy a vacation home if they have to pay New York income tax on their earnings. They'll go somewhere else."

State tax officials were surprised by the East End uproar. The number of audits of out-of-state residents with jobs in New York has been stable, with only "a slight increase" in recent years, they said. About 2,500 audits are conducted annually, though no figures were available indicating how many involved vacation homes.

"The folks we're talking about here are wealthy for the most part," said Tax Department spokesman Brad Maione. "They have accountants who keep track of these matters. This isn't news to them."

In one high-profile case, in 2000, lifestyle guru Martha Stewart was ordered to pay $221,677 in back taxes for 1991 and 1992 because her second home in East Hampton subjected her to full taxation. At the time, Stewart said she was a permanent resident of Westport, Conn. She has since moved to the Westchester County village of Bedford. 

A few days a year
More recently, New Canaan, Conn., residents John J. and Laura Barker were ordered to pay New York income taxes on their full income because of their second home in Napeague. He's a managing director at the investment house Neuberger Berman.

The Barkers don't dispute the New York State taxes on his wages but contend they aren't New Yorkers and shouldn't be taxed by the state on their other income.

The 1,122-square-foot house in Napeague was purchased for $260,000 in 1997, and the Barkers spent less than 20 days a year there in 2002, 2003 and 2004, the period covered by the tax dispute. Laura Barker's parents use the house considerably more.

John Barker said, "The law was not intended to entrap commuters who visit a second home a few days a year."

The case has caught the attention of East End businesses who are lobbying for a change in the tax law. Paul Brennan of Prudential Douglas Elliman Real Estate said the East End's "economic viability" is at risk.
 

A Connecticut couple on LI 

JOHN J. AND LAURA BARKER 

Occupations: John is a managing director at the Neuberger Berman investment house in Manhattan; Laura cares for their three children.

Permanent home: New Canaan, Conn.

Vacation home: Napeague in East Hampton Town

2002-04 Income Taxes Owed: $608,160

2002-04 Penalties Owed: $221,086

2002-04 Interest Owed: $226,602

Total due: $1.056 million

Source: NYS Tax Appeals Tribunal, decision Jan. 13, 2011.