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 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 Recording 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.” New York City charges its own tax as do other counties.
In NYC, the total mortgage recording tax rates are -
Your lender will also contribute 0.25% on top of those amounts. These rates are as a percentage of the loan balance. As a (very small) consolation prize, NYC chips in the first $30!
The tax 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.
The history of New York's mortgage recording tax dates back to 1906 when it first established by the state. Today it is a big money maker for both the state and city. The NYC tax alone generated almost $1 billion in 2014.
Thankfully there are some ways around the mortgage recording tax. Here are a few ways you can avoid it -Buy A Co-op
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, 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. While there are no plans to close this loophole, a 2015 analysis by New York's Independent Budget Office estimated doing so would raise almost $100 million per year for the city and $50 million for New York state.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. In order to cover the costs, we'd say the seller's loan needs to have a balance of at least $300,000. You'll also want to bring this up early in the process as there is some negotiation involved. A CEMA is good for the seller in that it can reduce their New York State transfer tax but they may want some of your mortgage recording tax savings as well.
Even if you successfully execute a CEMA, you’ll probably still be stuck paying some mortgage recording tax. After years of mortgage payments and generally rising property prices, you will likely need a loan larger that what the seller can provide.
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, 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 are on a primary residence or investment property. However, the mortgage recording tax does increase your cost basis for the property. When you sell, it would shield an equivalent amount of capital gains, reducing taxes at that point.
Disclaimer: This post should not be used as tax advice. Please contact a qualified accountant if you have any questions about your particular situation.