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In this issue of the Newsletter, we will take a look at the Continuing Lien Deduction as set forth under the New York State Real Property Transfer Tax and the New York City Real Property Transfer Tax. One of the unfortunate aspects of conveyances of real estate in New York is the payment of transfer tax imposed by both New York State and New York City. Both New York State and New York City take different approaches as to the Continuing Lien Deduction and it is important to keep in mind the nuances between the two taxing authorities.
New York State defines consideration as “the price actually paid or required to be paid for the real property or interest therein…” It also “includes the amount of any mortgage, purchase money mortgage, lien or other encumbrance, whether or not the underlying indebtedness is assumed or taken subject to.”
However, New York State also provides an out-so to speak as to what it considers “consideration.” This is where the Continuing Lien Deduction comes into play. New York State provides that “consideration does not include the amount of any lien or encumbrance remaining thereon at the time of sale where the conveyance involves a one-, two-, or three-family house or individual residential condominium unit or where the consideration for conveyance is less than $500,000.00.” Therefore, existing liens or encumbrances are deductible where the transfer is of a 1, 2 or 3 family residence or of an individual residential condominium unit regardless of the amount of consideration. However, existing liens or encumbrances are only deductible on any other conveyance (not a 1, 2 or 3 family residence or of individual residential condominium unit) when the amount of consideration is less than $500,000.00. It is important to note that the State does not allow the Continuing Lien Deduction to be used for Mansion Tax.
In its regulations, New York State provides examples to illustrate the Continuing Lien Deduction:
“A commercial building is sold for $800,000.00. The grantee assumed an existing $300,000 mortgage and paid $500,000 in cash. The tax is imposed on the entire $800,000 because the consideration exceeds $500,000 and the building is a non-qualifying residential property…”
“A purchases a one family residence from B for a total consideration of $150,000 ($100,000 in cash and the assumption of B’s existing mortgage of $50,000). Since the existing mortgage which is being assumed would constitute a continuing lien, in determining the taxable consideration for real estate transfer tax, A can deduct the amount of mortgage assumed ($150,000-$50,000=$100,000). Consequently, the tax is not computed on the gross consideration, but rather on gross consideration less the continuing lien (i.e., mortgage assumed).”
Unfortunately, New York City takes a different approach as to the Continuing Lien Deduction. The City’s approach is not as straight forward as the State’s. The Continuing Lien Deduction is referred to by the City as “Excludable Liens” and became effective again on August 28, 1997. New York City applies “Excludable liens” to “Transfers involving certain residential property or interest therein.” New York City provides “that with certain exceptions, the amount of mortgages, liens or encumbrances is excluded from consideration for the transfer on or after August 28, 1997 of a 1, 2 or 3 family house, an individual residential condominium unit or individual residential cooperative unit or economic interest in such property if the mortgage, lien or encumbrance existed before the date of the transfer and remains on the property or interest after the date of the transfer.” The City, then, goes on to provide a caveat-that is, “this provision does not apply to any mortgage, lien or encumbrance placed on the property or interest in connection with, or in anticipation of, the transfer, or by reason of deferred payments of the purchase price.”
The good news is that in terms of divorce or gifts, “under the rules, an existing mortgage will be excluded in all transfers pursuant to gifts or divorce.” The bad news is that in “any other transfers, an examination time period beginning 6 months prior to, and ending 3 months after, the transfer is established.” The City takes the position that “mortgages placed on the property or discharged outside that time period will be excluded unless there is documentary evidence that the mortgage was placed or discharged in connection with the transfer.” Further, “mortgages placed or discharged within the examination period will be excluded unless the facts and circumstances indicate that the mortgage was placed or discharged in connection with the transfer. Mortgages that are modified will be excluded in all cases except where the modifications occur within the examination period and AND result in a change of identity of the lender PLUS a change of at least 10% in either the interest rate or term of the mortgage loan.”
Therefore, it is reasonable to state the City’ rules as to what it considers “Excludable Liens” would be subject to greater scrutiny and interpretation versus that of the State-just given the City’s requirements and details. The real estate practitioner should at least be aware of that fact before considering taking the “Continuing Lien Deduction” on any given transaction.
Effective December 1, 2010, the Nassau County Clerk has increased its fee it charges for recording and indexing or satisfaction or cancellation of claims and liens”.
The block index recording fee has been increased from $10.00 to $75.00
The City of Peekskill will impose a Transfer Tax of (1%) of consideration, payable by the grantor on a deed delivered on or after December 1, 2010. The tax is required to be paid within thirty days after delivery of the deed and prior to recording.
If you have any questions or would like further information regarding any of the articles in this newsletter, please contact Anthony Chiellino at (212) 651-1200 or achiellino@prestitle.com.
Also, if there are any topics that you would like us to include in future newsletters, please feel free to e-mail us with suggestions at info@prestitle.com.
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