When purchasing real property, whether a single-family home or a multi-family building, a purchaser’s first concerns are probably going to be: 1) how much are my property taxes? and 2) how much will I have to pay in transfer taxes at closing?
These costs are interrelated and can be significant, so it is recommended that purchasers have an experienced attorney conduct due diligence on the property before they sign a contract to prevent any surprises at closing or in the future.
In order to determine how much the property taxes will be, the purchaser needs to review the property tax bills and the rate at which the property is being taxed. Property tax bills are readily available online through the New York City Department of Finance (“DOF”) website for properties located in all five boroughs.
The property tax bills indicate the “Building Class” and corresponding “Tax Class.”
A review of the most recent property tax bill for the premises will indicate how the property is classified by DOF for real estate tax purposes – whether the property is taxed at a commercial rate or a residential rate.
Once a purchaser has ascertained how the property is taxed by DOF, he/she should then see how the New York City Department of Buildings (DOB) classifies the legal use of the property.
If the property has a certificate of occupancy (CO), then DOB will classify the property based on the CO.
In many instances, however, the premises may have been built prior to the enforcement of certificate of occupancy regulations in 1938, so there will be no CO. If there is no CO, then DOB will look at the initial inspection cards (I-cards) for the property to determine its legal use.
Often, there is a conflict between how DOF and DOB classify a property. DOF may have the property classified as residential whereas DOB records indicate that the property is commercial, or vice versa.
If the property is residential, then the Seller will pay New York City transfer taxes at closing at the residential rate (1% if the purchase price is $500,000.00 or less and 1.425% if the purchase price is $500,000.01 or greater).
Moreover, if the property is residential, the Purchaser will be required to pay the New York City mansion tax (1% of the purchase price) at closing on all purchases of $1,000,000.00 or more.
On the other hand, if the property is commercial, then the Seller will pay New York City transfer taxes at closing at the commercial rate (1.425% if the purchase price is $500,000.00 or less and 2.625% if the purchase price is $500,000.01 or greater) and there will be no mansion tax payable by the Purchaser at closing.
Mortgage taxes will also be imposed on the purchaser at different rates, based on the property’s classification.
We have found that there is no clear-cut rule for how conflicts between DOF and DOB are handled for transfer tax purposes at closing, and it depends on each title company’s policy.
When there is a conflict, some title companies consider DOB’s classification of a property to be definitive, while other title companies consider DOF’s classification to be definitive.
Moreover, some title companies look to the current actual use of the property when there are conflicts between DOF and DOB.
In order to prevent unexpected costs at closing and to deal with the possibility of an audit by DOF after closing, it is important for a purchaser’s counsel to discuss this issue with the title company and seller’s counsel to address any conflicts between DOF and DOB’s classification of the property, prior to signing the contract, so as to ensure that all parties are in agreement as to how such conflict will be handled at closing.
Furthermore, if the purchaser believes the DOF classification of the property is incorrect, then the purchaser should seek to have the DOF classification changed post-closing.