When you buy an apartment in New York City, you need to budget for the fees and taxes that come with this big financial transaction. These are called closing costs, and they may include a mansion tax (on apartments at or above $1 million), a transfer tax, title insurance, a lien search (for co-ops), and—if you are using bank financing—a mortgage recording tax.
This last tax is calculated as a percentage of the mortgage (not the purchase price). So if you borrow $500,000 or less, you pay 1.8 percent of the loan as a tax. If you borrow more than $500,000, you pay 1.925 percent. (Both of these figures include a 0.5 percent state levy, and New Yorkers are entitled to a $30 discount on their payment.)
In case you're wondering, the reason you pay the mortgage recording tax, according to the Department of Taxation and Finance is for "the privilege of recording a mortgage."
“It can be extremely expensive,” says Neil Garfinkel, managing partner at the law firm Abrams, Garfinkel, Margolis, Bergson. It’s also a tax you will have to pay if you refinance.
However, there are ways to save on the mortgage recording tax—or even avoid it altogether. Read on for some suggestions.
Co-ops are exempt
Buying a co-op spares you the pain of this tax, which applies to real property—where your purchase gives you a deed. As a shareholder in a co-op you don’t pay it. This is one of the reasons closing costs for co-ops are much lower than condos.
You can do a financial maneuver called a mortgage assignment under a Consolidation, Extension, and Modification Agreement, also called a CEMA loan. This is one way to reduce the amount of mortgage recording tax you pay. This is where the mortgage is assigned from one lender to another and the tax is calculated on the unpaid principal. Practically speaking, this means a buyer could have the seller's mortgage assigned and benefit from a significant tax exemption.
Here's how it works: Say an initial mortgage was for $1 million and the seller paid it down over the time to $900,000. If the mortgage was then assigned for $1 million, the buyer would only pay mortgage recording tax on $100,000 at the reduced tax rate of 1.8 percent. You don't pay twice for the unpaid principal of the original mortgage when the loan is assigned.
Garfinkel says the assignment CEMA is “used all the time” as a means to reducing the mortgage recording tax payment. With an assignment, you are not tied to the terms of the old mortgage.
“The terms are changed so if there was a prepayment penalty on the old one there may not be on the new one,” he says.
This is something to discuss with your attorney. “Not every lender is willing to give an assignment and not every new lender is willing to accept an assignment,” says Craig L. Price, a partner with Belkin, Burden, Wenig & Goldman.
A less common workaround on the mortgage recording tax is a mortgage assumption where you take over the seller's mortgage.
“The assumption is jumping into the shoes of the current borrower, so it’s the same interest rate, the same payments, the same payment schedule. Nothing has changed and you pay the tax on the change which is zero,” says Price.
This strategy for reducing the mortgage recording tax is less common than a mortgage assignment and incurs an assumption fee of around 1 percent. Price says assumptions can be popular if the original interest rate is lower than the current one—something that's not currently an issue with today's low rates.