Interested in receiving the latest title insurance, real estate and legal industry news? Click here to sign up for our free Newsletter.
The New York City Department of Finance (DOF) requires owners of income-producing properties that have actual assessed values greater than $40,000 to file annual Real Property Income and Expense (RPIE) statements. Types of properties that are generally subject to RPIE filing requirements include rental properties, cooperatives, income producing commercial condominiums, business-operating properties and net leased properties. Filings must be performed electronically unless a waiver is granted by DOF.
These statements are used by the City to estimate the market value of real property for tax purposes. The filing deadline for the RPIE statement falls on the September following the end of the preceding tax year. Non-filers and late-filers are subject to a hefty penalty of three to five percent of the property’s final actual assessed value. The penalties are imposed in the tax records and are liens on the property.
The DOF has not been diligent in enforcing these penalties however. In November, 2012, the DOF began imposing penalties for the 2010 RPIE statements. One unfortunate consequence of this two-year delay, has been the imposition of RPIE penalties against property owners who were not the owners of the property at the time the RPIE statements were due.
If the RPIE penalty relates to a period of time prior to the owner’s acquisition of title, a property owner may request a cancellation of RPIE penalties on the grounds that they are an innocent purchaser. Such a request should be submitted to the DOF’s RPIE Unit with an affidavit that states, among other things, that (1) the RPIE penalty relates to a period of time prior to the petitioner’s ownership of the property; (2) the transfer was an arms-length transaction; (3) the petitioner paid market value for the property; (4) the penalties were not shown in the tax records as unpaid at the time of the transfer; and (5) the DOF’s records did not show that the RPIE statement was past due. A form of this affidavit is available upon request. At this time of the writing of this article, the DOF had yet to act on any of the previously submitted innocent purchaser requests.
The DOF currently maintains an on-line list of properties whose owners have not timely filed, or failed to file, a 2010 RPIE statement. So a purchaser should review the DOF’s Non-Compliance Lists to ensure that the seller is in compliance with the RPIE filing requirements. The lists are currently available at the following link:
http://www.nyc.gov/html/dof/html/property/property_info_rpie.shtmlPurchasers may also consider adding contract representations that all presently due RPIE statements have been timely filed and that there are no RPIE penalties due for late filed or unfiled RPIE statements. If RPIE statements have not been timely filed, a contract provision for an escrow or indemnity may be added to cover future RPIE penalties.
The New York State Department of Taxation and Finance issued a tax bulletin (TB-MR-580) on January 7, 2013 to clarify the calculation of mortgage tax on indefinite mortgages, mortgages partially securing multiple debts and mortgages given by guarantees. The bulletin starts with the basic rule that mortgage tax is calculated on the principal amount of debt secured and that any new advances or re-advances will trigger additional mortgage tax on the new amounts (except for mortgages covered by section 253-b of the Tax Law).
Indefinite Mortgages
Mortgage tax on indefinite mortgages, as governed by section 256 of the Tax Law is calculated based on the market value of the property, unless the owner of the property provides a sworn statement of the maximum amount secured by the mortgage, either in the mortgage or in a separate document.
If a maximum amount secured provision, or “cap”, is provided then mortgage tax is calculated on the amount of the cap. Should advances or readvances be made in excess of the cap, those amounts are not enforceable until an instrument evidencing those amounts is recorded and the appropriate mortgage tax paid. Additionally, should the loan balance fall below the cap, any advances or readvances made thereafter will not be enforceable until an instrument evidencing those amounts is recorded and the appropriate mortgage tax paid. Thus on a credit line mortgage with advances and readvances being made above the cap, the mortgage will need to contain the following provisions: (1) the mortgage secures the first sums to be advanced by the lender; (2) the secured portion of the mortgage debt will equal the debt so long as the balance remains above the cap; and (3) only the last and final payments will be used to reduce and satisfy the secured portion of the debt.
Mortgage Partially Securing Multiple Debts
The tax bulletin also addresses a mortgage that partially secures multiple debts. When a mortgage covers multiple debts and the cap specifies an amount less than the total debt, the lenders share in the mortgage security in a manner that is proportionate to their share of the debt relative to the total debt at the time the mortgage is executed. However, the mortgage may alter this outcome by specifying the fraction of the cap that applies to each debt. The mortgage tax is paid on the amount of the cap and the same principles stated above regarding advances and readvances apply. Because there are multiple debts, the balance of each loan must be examined to determine if it has dropped below its portion of the secured amount.
Mortgage Made by a Guarantee
The last topic covered by the tax bulletin covers instruments pledged as security for another party’s debt, or guarantees. Mortgage tax is calculated on the maximum amount secured stated in the guarantee, which may be less than the amount the guaranteed debt. If the mortgage balance falls below the secured amount in the guarantee, the guarantee will only secure the remaining balance. Any advances or readvances made up to the amount of the original guarantee will be enforceable provided mortgage tax is paid on these new amounts. Any advances or readvances in excess of the original guarantee would not be subject to mortgage recording tax. No further mortgage recording tax will be due until the guaranteed amount is reduced below the guarantee amount provided that (1) the mortgage secures the first sums to be advanced by the lender; (2) the balance of the guaranteed debt remains above the maximum amount secured by the guarantee; and (3) only the last and final payments will be used to reduce and satisfy the secured portion of the debt.
On October 19, 2012, the NYS Court of Appeals held that mortgages held by federal credit unions are not exempt from the mortgage recording tax.
The appeal was brought by Hudson Valley Federal Credit Union, a member owned cooperative association incorporated under the Federal Credit Union Act of 1934. Hudson Valley argued that it was exempt from mortgage recording tax because (1) the Act states that their property and income are exempt from all taxation except for real property and personal property taxes; and (2) the credit unions are instrumentalities of the United States and are therefore immune from state taxation under the immunity clause.
Refusing to accept a literal interpretation of the Act, the Court ruled that the failure to explicitly exempt credit unions from mortgage recording tax was evidence that Congress did not intend for the exemption to extend to the mortgage recording tax. It also rejected the argument that federal credit unions were federal instrumentalities, finding that their form of ownership, funding and management did not establish a close connection to the federal government.
The NYS Department of Taxation and Finance has since issued a technical memorandum (TSB-M-12(1)R) in which it affirms its position that mortgages given to federal credit unions are subject to mortgage recording tax. The memorandum does however state that federal credit union mortgages are not subject to special additional tax as to real property principally improved by not more than six residential dwelling units, each having its own separate cooking facilities.
If you have any questions or would like further information regarding any of the articles in this newsletter, please contact Keith Eng, Esq. (keng@prestitle.com) or Anthony Chiellino at (achiellino@prestitle.com) or (212)651-1200.
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.
Click Here to See Our Previous News Letters