You’re getting ready to buy your first property in New York City. It’s exciting. It’s nerve-wracking. It’s expensive. Nevertheless, you feel you have a good idea of what costs to expect on closing day: purchase price – check, legal fees – check, title costs – wait, why is this title bill so high?! Chances are, the mortgage recording tax is the most expensive item on your title bill. So, what is it?
Table of Contents:
What Is The Mortgage Recording Tax in NYC?
How Much Is the Mortgage Recording Tax In NYC?
Who Pays the Mortgage Recording Tax In NYC?
How To Avoid Paying The Mortgage Recording Tax
How Is the Mortgage Recording Tax Filed?
Does The Mortgage Recording Tax Apply To Other Types of Mortgages?
Is The New York Mortgage Tax Deductible?
The mortgage recording is a tax New York State charges “on the privilege of recording a mortgage on real property located within the state” - what a privilege! New York City also charges its own tax as do other counties across the state. For the purposes of this article, we will be using rates charged in NYC.
The tax is simply a percentage of your mortgage amount and only applies to real property - so condos and houses (not co-ops).
If you’re putting down the typical 20%, the mortgage recording tax will likely be your largest closing cost. It’s not all bad news though! Unlike other closing costs, there are some ways to avoid the mortgage recording tax which we’ll explain in this post.
The mortgage recording tax in NYC varies depending on the size of your loan and the type of property you are purchasing. The various scenarios are...
All loans with a balance $500,000 or less: 2.05% of the mortgage amount
Residential purchases with a loan balance over $500,000: 2.175% of the mortgage amount
Commercial purchases with a loan balance over $500,000: 2.8% of the mortgage amount
As a (very small) consolation prize, NYC chips in the first $30!
For example, if you bought the average condo in Manhattan for $2,000,000 (crazy to think, but that’s the average!), with a 20% down payment, the total mortgage recording tax bill will be $34,770.
There's a small amount of good news here - for most residential transactions, your lender will contribute 0.25% to the mortgage recording tax. So for loans $500,000 or less, your portion of the mortgage recording tax will be 1.8% and for loans over $500,000, it will be 1.925%.
Unfortunately, the remainder is almost certainly on the buyer. While it has likely happened in some unique situations, it is very unusual to see the mortgage recording tax paid by anyone but the buyer.
Thankfully there are some ways around the mortgage recording tax. Here are a few ways you can avoid it -Buy A Co-op - Co-ops Are Excluded From Paying The Mortgage Recording Tax!
Remember that “privilege” for which you’re paying the mortgage recording tax? It only applies on mortgages on real property. That’s a big deal because when you buy a co-op, you’re buying personal property.
To briefly explain that, real property is basically property where you get a deed and own the physical property. For a house, that’s obvious - you’re buying a house. Even when purchasing a condo, you own that apartment - that box - within the larger building. For co-ops however, you’re buying shares in the building and the right to live in a specific unit. No physical property, no deed, no mortgage recording tax.
Buying a co-op is the easiest and most obvious way to avoid the entire mortgage recording tax.CEMA
You can also look into avoiding the mortgage recording tax if you assume the mortgage of the previous owner, a procedure called a "Consolidation, Extension or Modification Agreement" or CEMA. By taking over an existing mortgage, there’s no new mortgage recorded so there's no new mortgage recording tax.
This is a much more complicated way to avoid the mortgage recording tax because there are a lot of parties involved, some negotiation and additional costs. If you'd like to explore a CEMA, make sure to do it early in the process because it takes some time.
For a CEMA to make financial sense, the seller’s mortgage also needs to be large enough to justify going through the whole process as again, it is cumbersome and there is a cost to it.
A CEMA is usually good for the seller as they are able to deduct the amount of the CEMA when calculating the New York State transfer tax because of New York’s Continuing Lien Exclusion. That may not be enough for some sellers though - they may want some of your mortgage recording tax savings too.
Even if you successfully execute a CEMA, you’ll likely have to pay some mortgage recording tax. After years of mortgage payments and generally rising property prices, the seller’s mortgage probably won’t be big enough to finance your property.
The New York City Register Office collects the mortgage recording tax in Manhattan, Brooklyn, Queens and the Bronx. The Richmond County Clerk collects it in Staten Island.
All property documents for Manhattan, Brooklyn, Queens and the Bronx are recorded online using ACRIS, which is NYC’s online database of public property records. Documents for Staten Island must be recorded in person at the Richmond County Clerk’s Office.
MT-15, otherwise known as the Mortgage Recording Tax Return, is the New York State Department of Finance form that needs to be properly filled out and filed for your mortgage to be recorded.
Refinances - You shouldn’t have to pay the mortgage recording tax when you refinance but that’s not guaranteed. Especially if you are refinancing with a new lender, they may not handle the transaction correctly and you could be stuck paying the mortgage recording tax. You should always bring up the mortgage recording tax with your lender(s) to discuss your specific transaction and minimize the chance of triggering the mortgage recording tax.
Home Equity Line of Credit (HELOC) - On the other hand, the mortgage recording tax does apply to HELOCs. Not only that, it applies to the full amount of the credit line available, not how much you draw on the line. For example, if you open a $200,000 HELOC on your condo but never touch it, you will still owe a mortgage recording tax of almost $4,000.
The mortgage recording tax is not deductible in the way that real estate property taxes on a personal residence are deductible - as an itemized deduction on the homeowner's income tax return. Nor are they deductible as a business expense on income-producing property as property taxes would be.
However, payment of the mortgage recording tax does give rise to the possibility of a deferred reduction in taxes that may be due in that the amount of tax paid as an expense of acquisition, thereby increasing the cost and reducing the net capital gain realized by the taxpayer when the property is sold.
Disclaimer: This post should not be used as tax advice. Please contact a qualified accountant if you have any questions about your particular situation.