Audit Report on the Tax Classification of Real Property in the Bronx by the New York City Department of Finance

Executive Summary

This audit of the New York City Department of Finance (DOF) was conducted to determine whether DOF’s procedures ensure that mixed use properties in the borough of the Bronx classified as Tax Class 1 are correctly classified.  In accordance with the New York City Real Property Tax Law (RPTL), DOF classifies every parcel of property in New York City for real-estate purposes.  These tax classes are as follows:

• Class 1: Consists of residential properties with three or fewer units and “Mixed Commercial/Residential Use” (mixed-use) properties with three or fewer residential and commercial units, where 50 percent or more of the space is used for residential purposes.
• Class 2: Includes all other primarily residential properties that are not designated Class 1.  Class 2 also has three sub-classes:
  • Class 2a for a 4-to-6 unit rental building;
  • Class 2b for a 7-to-10 unit rental building; and
  • Class 2c for a 2-to-10 unit cooperative or condominium.
• Class 3: Includes real estate of utility corporations and special franchise properties, excluding land and certain buildings.
• Class 4: Includes all other properties, such as stores, warehouses, hotels, office buildings and any vacant land not classified as Class 1.

Properties are assessed at a percentage of their full market value based on their classifications. Class 1 properties are assessed at 6 percent of market value and Class 2, 3, and 4 properties are assessed at 45 percent.

Audit Findings and Conclusions

Based on our exterior inspections of properties listed by DOF as Class 1 mixed-use in May 2016 on the assessment rolls, we preliminarily identified 53 out of 1,143 listed as Tax Class 1 that appeared to be misclassified.  Following notification of our preliminary findings, DOF requested our list of the 53 properties that appeared to be misclassified.  DOF assessors then performed interior inspections, interviewed tenants and/or employees, and confirmed that 22 of the 53 properties should be reclassified. DOF still needs to conduct an interior inspection of one additional property before it makes a final decision about its classification. DOF determined that the remaining 30 properties do not require reclassification.  While DOF had inspected eight of the 22 properties prior to our inspections, the assessors only recommended that one of the eight properties should change tax and building classifications.

Using DOF’s guidelines, we calculated that changing the tax classification of the 22 properties would result in an additional $288,391 in taxes after the increases phase in over the required five-year period.

Audit Recommendations

• Based on the audit findings, we make the following four recommendations:
• DOF should make the necessary adjustments to the assessment rolls for the 22 properties that it confirmed are misclassified to ensure that the property owner is assessed the proper amount of tax.
• DOF should ensure that property tax classification changes recommended by their assessors are implemented by the next tax year.
• DOF should determine why their inspectors did not recommend that the classifications of these properties be changed and enhance their training to address any issues identified.
• DOF should consider enhancing its oversight and quality assurance functions to ensure proper classification of properties.

Agency Response

We received a written response from DOF on September 22, 2016.  In its response, DOF generally agreed with the audit’s recommendations and stated that it would address the issues identified.
Further, the agency stated, “All of the lots provided by the City Comptroller’s office have been inspected by assessing staff and those requiring a change in tax classification have been reclassified in the Computer Assisted Mass Appraisal application.”