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Most buyers know that buying a home means paying property taxes and, if they sell, eventually paying transfer taxes. What many first-time buyers in New York City don’t realize is that when one buys a home, they may also be expected to pay mortgage recording taxes, but the surprise is understandable. Outside New York State, only six U.S. states (Alabama, Florida, Kansas, Minnesota, Oklahoma, and Tennessee) have a mortgage recording tax.
This article explains what mortgage recording taxes are, how they are calculated, why these taxes exist, and most importantly, how best to avoid them.
This article explains what mortgage recording taxes are, how they are calculated, why these taxes exist, and most importantly, how best to avoid them.
In this article:
What Are Mortgage Recording Taxes?
Unless you purchase a home in a cash-only deal, you’ll be subject to a mortgage recording tax. As outlined on the NYC Department of Finance website, a mortgage recording tax “is charged when mortgages for property in New York City are recorded.” While other New York State residents also pay a mortgage recording tax, they typically pay less because, in New York City, buyers who finance their properties aren’t simply subject to a state mortgage recording tax but also one imposed by the city.
Who Pays and How Much?
As a rule, in New York City, the mortgage recording tax is 1.8% on any property under $500,000 and 1.925% on any property over $500,000. That said, there are some exemptions, and some properties, including commercial properties, are subject to even higher mortgage recording taxes. For a complete breakdown of applicable mortgage recording taxes, visit the New York City and New York State mortgage recording tax websites.
Why Do the City and State Tax Residents on Loans?
Dating back to 1906, New York State’s mortgage recording tax has long served as a way for the state to acquire additional taxes from residents. When it was originally imposed, it was set at 0.5%, and over a century later, the rate remains the same. In most parts of the state, the tax is paid to county treasuries. In New York City, the state mortgage recording tax is paid to the NYC general fund, but this isn’t the only tax collected and directed to the city’s general fund when New Yorkers finance a property purchase.
In 1971, New York City imposed its own mortgage recording tax at a rate of 0.5 percent. In 1982, in an attempt to acquire additional funds to support the New York City Transit Authority, the tax underwent its first increase. In 1990, the city increased its mortgage recording tax again, bringing it to the current level. A 2020 study by the Department of Finance reported an annual tax liability from mortgage recording taxes in excess of 1 billion, with $790.9 million earmarked for the NYC general fund and another $425.6 million earmarked for other local authorities, including the MTA, SONYMA, and the NYC Transit Authority.
Can You Avoid Mortgage Recording Taxes?
Fortunately, there are several ways to mitigate or avoid paying mortgage recording taxes in New York City.
First, as already stated, if you’re buying a property in a cash-only deal, you’re in luck since no mortgage means no mortgage recording tax. Of course, you’ll still be subject to future property and, if you sell, transfer taxes.
The most common way to avoid paying a mortgage recording tax in New York City is to purchase a co-op rather than a condo or another type of residential property. You might wonder why co-ops, but not condos and other residential properties, are exempt from the mortgage recording tax, and the answer is simple. When you purchase a co-op rather than a condo or house, you’re technically purchasing shares in a corporation rather than real property. As a result, you are exempt from paying mortgage recording taxes.
Another option is to apply for a Consolidation, Extension, & Modification Agreement or CEMA. Unique to New Yorkers, a CEMA helps buyers mitigate their tax liability when purchasing a property subject to mortgage transfer taxes. With a CEMA, the existing mortgage on the property is transferred to the buyer who, in turn, consolidates it with a new loan. The advantage to the buyer is that they are only expected to pay mortgage recording taxes on the amount of the new loan. For example, if a buyer purchases a condo with 20% down for $1 million and the seller still owes $500,000 on their current mortgage but the mortgage is transferred, mortgage transfer taxes will only be applied to $300,000 rather than $800,000. This tax loophole, while legal, is somewhat uncommon due to its onerous nature. Among other obstacles, both the seller’s lender and the buyer’s lender must agree to close the new loan as a CEMA.
If a cash-only deal, coop, or CEMA aren’t viable, there is one final way to mitigate or avoid mortgage recording taxes. If you simply want to lower your liability, consider buying in a New York State county that doesn’t impose a local mortgage recording tax on top of the state mortgage recording tax (e.g., Chemung, Chenango, Jefferson, Montgomery, Otsego, St. Lawrence, Tioga, or Ulster). If you want to remain within commuting distance to New York City and avoid paying mortgage recording taxes altogether, the best option is to simply move across the state line to New Jersey or Connecticut where there are no mortgage recording taxes.
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Contributing Writer
Cait Etherington
Cait Etherington has over twenty years of experience working as a journalist and communications consultant. Her articles and reviews have been published in newspapers and magazines across the United States and internationally. An experienced financial writer, Cait is committed to exposing the human side of stories about contemporary business, banking and workplace relations. She also enjoys writing about trends, lifestyles and real estate in New York City where she lives with her family in a cozy apartment on the twentieth floor of a Manhattan high rise.
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