Purchasing a home in New York can be an exhilarating yet financially daunting endeavor, particularly due to the array of taxes involved. Among these, the Mortgage Recording Tax (MRT) stands out as a significant cost, layered atop other transfer taxes like the Mansion Tax and the real estate transfer taxes which can exceed 8% when combined (excluding brokerage fees and other closing costs). This blog will delve into the intricacies of the MRT in New York State and New York City, offer a critique on its impact, compare it with similar taxes across the USA, explore its history, and discuss strategies to mitigate or avoid this tax.
What is the Mortgage Recording Tax?
The Mortgage Recording Tax is levied by both New York State and New York City on the privilege of recording a mortgage against real property. This tax is calculated based on the mortgage amount, not the purchase price, and is due at the time of filing or recording the mortgage document.
Tax Rates and Thresholds
- New York State:
- A basic tax of 0.50% on the mortgage amount is applied throughout New York State.
- New York City:
- Residential Properties:
- For mortgages up to $500,000: 2.05% (minus $30 for one or two-family dwellings)
- For mortgages $500,000 and above: 2.175% (minus $30 for one or two-family dwellings)
- The buyer’s lender typically pays 0.25% of this tax, reducing the effective rate for the buyer to 1.8% for under $500,000 and 1.925% for over $500,000, though it is passed along in a higher interest rate.
- Commercial Properties: A flat rate of 2.8% for all mortgages.
- Residential Properties:
Critique of the Mortgage Recording Tax
High Costs: The MRT, especially in NYC, adds a substantial cost to home buying or refinancing, on top of already high property prices, insurance, and other fees. This can deter potential buyers or force them to seek properties in less taxed areas.
- Lack of Adjustment: Critics argue that the tax rates and thresholds have not been adjusted adequately for inflation or market conditions, disproportionately affecting middle-class families as property values soar.
- Cumulative Tax Burden: When combined with the Mansion Tax and transfer taxes, the financial burden on buyers escalates, potentially cooling the real estate market and impacting liquidity.
- Economic Distortion: The tax might encourage property owners to refinance less often or in smaller amounts to avoid the tax, possibly leading to suboptimal financial decisions.
Comparative Analysis
- Other U.S. Cities and States:
- Many states do not impose a mortgage recording tax. For instance, New Jersey and Connecticut do not have this tax, making them more attractive for real estate transactions from a taxation perspective.
- Florida and Texas also lack a similar state-wide mortgage tax, though local taxes might apply.
- San Francisco has a different approach, focusing on transfer taxes which increase with property value but doesn’t have a specific mortgage recording tax like NYC.
Origins and Evolution
The mortgage recording tax in New York dates back to 1906 when it was first established to generate revenue for the state. Over time:
- 1971: NYC introduced its additional tax, initially at a lower rate.
- 1982 and 1990: The city increased the rates to support the MTA and other services, reflecting the tax’s role in funding public infrastructure.
- 2019: Changes in tax structure were proposed but not significantly altered, maintaining the high rates despite calls for reform.
Strategies to Mitigate or Avoid the Mortgage Recording Tax
- Co-op Purchases: Since co-ops are considered personal property, they are exempt from the MRT. This is a significant reason why co-op closings can be less costly than condos or houses.
- CEMA Loans (Consolidation, Extension, and Modification Agreement):
- This unique New York strategy allows borrowers to pay the MRT only on the difference between their new mortgage and any existing mortgage when refinancing or purchasing. The process involves the original lender assigning the mortgage to the new lender, thus avoiding tax on the whole mortgage amount.
- Refinancing with the Same Lender: Sometimes, if you refinance with the same lender, they might handle the paperwork in a way that minimizes or eliminates the need for new MRT.
- Assumptions: Assuming an existing mortgage can bypass the recording of a new mortgage, although this is rare due to clauses that prevent such assumptions.
- Purchasing with Cash: No mortgage means no MRT, though this isn’t an option for everyone.
Conclusion
The Mortgage Recording Tax in New York, while providing essential revenue for state and city services, places an additional financial burden on property buyers in an already expensive market. Its structure has been critiqued for not evolving with the market’s or inflation’s realities. While there are strategies to mitigate its impact, these often require specific conditions or additional legal maneuvering, which might not be accessible or known to all. As with any tax, the MRT serves as a reminder of the complex interplay between public finance needs and individual economic choices. For those navigating the residential financing landscape in New York, understanding and potentially reducing the impact of this tax is crucial to making informed decisions about property investment or ownership.
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References:Â
https://www.nyc.gov/site/finance/property/property-mortgage-recording-tax-mrt.page
