Barry Sunshine, Janover LLC

There are several tax savings opportunities when individuals acquire or refinance real estate with mortgages securing the property. It doesn’t matter whether the property is owned individually or through a partnership. Some of these tax savings are significant and often overlooked.

Credit for NYS Mortgage Recording Tax (MRT)

Under NYS tax law, there is a refundable income tax credit in the year in which an individual, partnership, trust or estate that purchases or refinances its NYS real estate property(ies). This often overlooked credit is referred to as the Special Additional Mortgage Tax Credit. There are a number of reasons why this credit is overlooked. Some reasons include the fact that many real estate owners are not aware of this credit or the information regarding the credit is not readily available from the closing documents. Tax credits are more desirable than income tax deductions since credits reduce the income tax due dollar for dollar, whereas deductions reduce taxable income.

At the time a NYS property is mortgaged, NYS imposes a MRT of 50 cents per $100 of mortgage debt. In addition, there is an additional special mortgage recording tax of 25 cents per $100 of mortgage debt. All total, the MRT can be $1.75 per $100 mortgage balance. Additionally, if the property is located in NYC, then the NYC and NYS MRT can be as high as $2.80 per $100 mortgage balance. This tax applies whether the property owner is either purchasing the property or refinancing the property and whether the owner uses the debt proceeds for purchasing or improving the property or for any other purpose.

In the case of consolidation, extension or modification of an existing mortgage, the tax applies only to the incremental amount of the mortgage and not on the entire mortgage balance. In this case, you can save a portion of the MRT by asking the banks to assign the existing mortgage from the previous lender to the new lender.

While the MRT is a fact of life and cannot be avoided, there is an often overlooked NYS tax credit associated with paying the tax. The tax credit is referred to as the NYS MRT and it is refundable. The credit is for a portion of the MRT that relates to the NYS special additional mortgage recording tax. The tax savings can be very significant. The NYS mortgage recording tax credit is calculated on NYS Form IT-256 and it is filed with the owner’s personal income tax return. If you are a partner in a real estate investment, then the credit is computed at the partnership level and the credit passes to the partners.

For example, one of our real estate clients purchased a commercial building for $60 million and financed it with a $50 million mortgage. The total mortgage recording tax was over $1 million. The special additional mortgage recording tax was about $125,000. We were able to claim an income tax credit for the full $125,000. If you don’t owe any NYS tax, then the credit can either be refunded or applied to reduce next year’s income tax. The credit applies for both residential and commercial properties; however, the credit doesn’t apply to a residential property that has six or less units and is located in New York, Bronx, Queens, Kings, Richmond, Duchess, Nassau, Orange, Putnam, Rockland, Suffolk, Westchester and Erie Counties. Further, if you did not claim the credit in past years, then you can file an amended income tax return to obtain a tax refund.

Possible Income Tax Deduction for MRT

There is a fair amount of debate amongst tax professionals whether the MRT is deductible or not for Federal income tax purposes. Generally, the MRT is not currently deductible to the extent paid in connection with the acquisition of real estate. In this case, the MRT is capitalized and its cost is recovered through depreciation. However, if a property owner refinances an income producing property or property used in a business and the proceeds are used for business purposes, then the MRT could be deductible for income tax purposes.

The above offers some often overlooked opportunities for taxpayers to reduce their income tax liabilities. All property owners should consult their tax advisors regarding how they can best take advantage of these opportunities.

Barry Sunshine, CPA is a senior tax partner at Janover LLC, Garden City, N.Y.