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Mortgage recording tax: are you getting all the credit you deserve?

When you purchase or refinance commercial real estate and certain residential real estate in New York State, the mortgage recording tax can add significantly to your financing costs. Depending on the type of property and its location, the tax can range from 75 cents to $2.75 for each $100 of debt secured by the mortgage.

Recent legislation offers some relief by providing an income tax credit for one component of the tax: the "special additional mortgage recording tax" of 25 cents per $100 of debt. The credit applies retroactively to January 1, 2004, so if you paid the special tax last year but didn't claim the credit on your 2004 return, you can still claim it on an amended return. The credit is refundable, which means that even if it exceeds your tax for the year, you can elect to treat the unused portion of the credit as an overpayment of tax and claim a refund.

Mortgage recording taxes can add up quickly, especially for large commercial properties. Say you purchased a Manhattan office building in 2004 for $50 million, financed with a $40 million bank loan secured by a mortgage on the property. When you record the mortgage, your taxes are computed as follows:

Basic tax (50 cents per $100) $200,000

Additional tax (25 cents per $100) $100,000

Special additional tax (25 cents per $100) $100,000

City of New York tax ($1.75 per $100) $700,000

Total mortgage recording taxes $1.1 million

Under the new law, you're entitled to claim a $100,000 credit for the special additional tax.

In general, any borrower or lender who pays the special additional mortgage recording tax is eligible for the credit. With certain exceptions, lenders pay the tax for "residential mortgages"--that is, mortgages on properties with six dwelling units or less. For most other mortgages, the borrower pays the tax.

The credit is not available, however, for taxes paid on residential mortgages on properties located in Erie County or within the Metropolitan Commuter Transportation District (MCTD). Unlike previous credits, which were available only to corporations, the new credit may also be claimed by partners in partnerships, as well as estates and trusts and their beneficiaries. To qualify for the credit, the partnership, estate or trust must have paid the special additional tax for a tax year beginning on or after January 1, 2004.

Shareholders of New York S corporations are not eligible for the credit. Rather, the corporation must claim the credit on its New York State S corporation return.

If you purchase commercial real estate, purchase residential real estate with more than six dwelling units, or refinance a mortgage on one of these properties, you're subject to the special additional mortgage recording tax and, therefore, eligible for an income tax credit.

To ensure that you get the credit you deserve, determine whether you paid the special tax during your 2004 tax year and file an amended return if necessary to claim the credit.

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Title Annotation:INSIDER'S OUTLOOK
Author:Wieder, Marc
Publication:Real Estate Weekly
Date:Mar 22, 2006
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