By Marc Wieder, Co-Practice Leader, Anchin, Block & Anchin
New York mortgage recording taxes can add significantly to the cost of financing a project, so it’s important for developers to ensure that they’re claiming all the tax credits they deserve. Here’s a brief overview of these taxes and the available credits.
Calculating the Tax
The amount of mortgage recording taxes ranges from $.75 to $2.80 for each $100 of debt secured by a mortgage, depending on the type of property being financed and its location. All counties impose a state
mortgage recording tax, which consists of a $.50 basic tax and a $.25 “special additional tax.” In addition, some counties impose an “additional tax” of $.25 or $.30. Finally, many counties and cities impose a local tax — typically, $.25 or $.50, but reaching $1.75 for mortgages securing $500,000 or more in New York City.
Suppose, for example, that a developer acquires a Manhattan apartment building secured by a $50 million mortgage. Its mortgage recording taxes would be calculated as follows:
Credit for condominium sales
Condominium developers/sponsors that pay mortgage recording taxes on construction or blanket mortgages are entitled to a partial credit when they sell individual condo units. Technically, the credit belongs to the purchaser, but in practice sales contracts usually shift the benefit of the credit to the developer.
The credit applies against mortgage recording taxes (except the special additional tax) otherwise payable on a purchase money mortgage. The amount of the credit is the purchaser’s pro rata percentage interest in the common elements multiplied by the mortgage recording taxes the developer already paid on the underlying mortgage. Allocating the credit to the developer doesn’t affect the amount the purchaser pays. Rather, the purchaser’s mortgage recording taxes are reduced by the amount of the credit with a corresponding increase in the purchase price.
To qualify for the credit with respect to a particular condo unit, the developer must submit an affidavit with the mortgage being recorded attesting that the following requirements were met:
If the underlying mortgage is for a construction loan, the loan proceeds were applied to construction of the condo unit in question.
If the underlying mortgage is a blanket mortgage, the proceeds were applied exclusively to 1) payment of the construction mortgage, 2) payment of capital expenditures or expenses for development or operation of the condominium, or 3) purchase of land or buildings for the condominium (provided the declaration of condominium was recorded no more than two years after the purchase).
The first condo unit sale took place within two years after the underlying mortgage was recorded.
Credit for Special Additional Tax
Since 2004, New York has offered a refundable credit against income or franchise taxes for individuals or businesses that pay the special additional mortgage recording tax. In our example above, the developer would be entitled to a $125,000 tax credit. This often overlooked credit is available to corporations as well as to partners in partnerships and members of LLCs taxed as partnerships. Shareholders in New York S corporations are not eligible for the credit. Instead, the corporation claims the credit on its corporate return.
There are a few exceptions to eligibility for the credit. For example, it’s not available for residential mortgages in certain counties. But, for the most part, the credit provides a valuable tax benefit for developers that pay the special additional tax.
Don’t Leave Money on the Table
As you can see, mortgage recording taxes can be quite substantial, especially in New York City. To ease the pain of these taxes, developers should be sure to claim all of the credits to which they’re entitled.