How to understand the magnitude of property taxes in New York State.

There are two types of taxes imposed by New York State, as well as by certain counties and municipalities, that directly affect transactions for both residential and commercial real property. The “real property transfer tax” is a tax on conveyances of real property and on the transfer of controlling interests in entities that own real property. The “mortgage recording tax” is imposed upon a mortgage or similar security instrument is recorded. It is important to understand and determine the magnitude of transfer and mortgage recording taxes well before closing because they; (1) generally comprise a significant transaction cost; (2) vary depending on the type and location of the real property and; (3) must be paid concurrently with the mortgage, deed or other conveyance and payment is a condition to acceptance for recording.

Real Property Transfer Tax

Real property transfer taxes are payable in transactions where an interest in real property is conveyed, including in connection with a sale, exchange, assignment, surrender, option, or foreclosure. Additionally, real property transfer taxes are payable upon the transfer of a controlling interest (50% or more) in an entity that has an interest in real property. The aggregation rule applies to any related transfers within a three year period, meaning that multiple transfers may be aggregated and qualify as a transfer of a controlling interest if the transactions are found to be related or done for the sole purpose of evading the tax.

New York State imposes a tax on transfers of interests in commercial and residential real property located within the State with a purchase price that exceeds $500. The tax is charged at a base-level rate of 0.4%. If the real property is in New York City (or any city with a population of one million or more) the state charges an additional 1.25% for: (1) residential property with a purchase price of $3 million or more; and (2) other types of property (commercial, typically) with a purchase price of $2 million or more. This tax is generally paid by the seller of such real property. In addition, the State charges a second transfer tax, often referred to as the “mansion tax,” on any transfer of an interest in residential real property with a purchase price of $1 million or more. The mansion tax is charged at a rate of 1% of the total purchase price. If the residential property is in New York City (or any city with a population of one million or more) and the purchase price is $2 million or more, there is a supplemental mansion tax ranging from 0.25% to 2.90%. The buyer is primarily responsible for payment of the mansion tax.

New York City imposes a tax for transfers of real property where the property is located within the City and the consideration exceeds $25,000. The rate at which the tax is charged is dependent on the amount of consideration and type of property being conveyed. If the property is residential, the tax is charged at a rate of (1) 1% when the purchase price is $500,000 or less; and (2) 1.425% when the purchase price is greater than $500,000. For all other types of property, the tax is charged at a rate of (1) 1.425% when the purchase price is $500,000 or less; and (2) 2.625% when the consideration is more than $500,000.Municipalities outside of New York City may also impose their own real property transfer tax and are typically subject to a different transfer tax rate, as the New York State has authorised local towns and counties to adopt their own transfer tax laws.

Mortgage Recording Tax.

Mortgage recording taxes are imposed in connection with the recording of a mortgage. Other instruments that secure a debt (like an assignment of rents) are also subject to the tax, but not if filed in connection with a mortgage that secures the same debt. The mortgage recording tax is typically paid by the borrower, except that in residential home mortgages, the lender is required to pay a portion of the tax.

New York State assesses the following three taxes when a mortgage is to be recorded: (1) a “basic tax” equal to $0.50 for each $100; (2) a “special additional tax” equal to $0.25 for each $100; and (3) an “additional tax” equal to $0.30 for each $100 if the property is located within the Metropolitan Commuter Transportation District (“MCTD”). The additional tax is earmarked specifically for the funding of regional transportation districts and is imposed at a higher rate if the property is located within the MCTD. The MCTD includes the following counties: New York City, Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk and Westchester. It is important to consider the location of the property because some counties located outside of the MCTD have the option to suspend, and have suspended, the additional tax.

Under New York Tax Law, cities in New York State with a population of one million or more may impose their own mortgage recording tax. Currently, New York City is the only city that meets this test; however, Yonkers also charges its own mortgage recording tax of $.50 for each $100. In New York City, all mortgages on properties located within the city are subject to tax assessed at the following rates: (1) $1 for each $100 if the secured amount is less than $500,000; (2) $1.125 for each $100 if the secured amount is $500 or more if the property is a 1-3 family home or individual condominium unit; and (3) $1.75 for each $100 if the secured amount is $500,000 or more and the property is not a 1-3 family home or individual condominium unit.

Mortgage recording taxes are due only once on each debt, and so long as that debt remains outstanding and unpaid, no additional taxes are due. This has led to a protocol in New York State where mortgages in commercial transactions are typically assigned to a new lender (rather than satisfied) upon a sale or refinance in order to pay mortgage recording tax only on any additional funds being lent. A new note/mortgage is created for the additional funds and mortgage recording tax is paid on the additional funds, after which the pre-existing debt and the new debt are are consolidated and restated into one aggregate debt.