New York Real Estate Tax Plan Mitigates Mortgage Interest Pain

The monthly cost of financing a home purchase has risen, thanks to record-high interest rates. So how can attorneys and real estate agents help their clients stanch the pain?

Rather than allowing potential clients to sulk in their buyer’s remorse while dreaming of an interest rate time machine, they should start exploring other ways to save. One such way, at least in the state of New York, is a purchase CEMA (consolidation, modification, and extension agreement).

While we can’t control interest rate fluctuation and its impact on monthly mortgage payments, there are still considerable closing costs that come along with purchasing a residential property in New York. Mortgage recording tax is one of them. It varies by county, but in New York City, this rate is 1.8% or 1.925% of the mortgage amount, depending on the size of the loan.

Using a purchase CEMA can eliminate much (or sometimes all) of this tax. In such a case, a buyer may assume a seller’s loan balance and in turn only be taxed on the “new money amount,” or the difference between the seller’s outstanding principal balance and the buyer’s new loan amount. Explained without the gibberish, if a seller has $1 million left on their mortgage, and a buyer is getting a $1 million mortgage themselves, they may be eligible to pay $0 in mortgage tax, saving nearly $20,000.

Many people in New York may not have heard of, or avoid, purchase CEMAs because they’re complex transactions that require significant extra work for the attorneys involved. They require an additional attorney (representing the seller’s lender) to the already crowded party at the closing table (consisting of attorneys for buyer, seller, buyer’s bank, title company, and management company for condominiums).

With so many cooks in the kitchen, it’s helpful to make sure all attorneys involved in the transaction are working together and to designate which party is responsible for each step of the process.

Many savvy New York real estate attorneys will automatically negotiate a clause in their contract rider that provides for the cooperation of all parties if a CEMA is a viable option. Before advising clients on any potential CEMA mortgage tax savings, attorneys and real estate agents will need to first check to make sure the initial foundational pieces of the puzzle are already in place. For a purchase CEMA to work, the seller must have an existing mortgage on the property.

Additionally, the seller’s lender and the buyer’s lender must respectively be willing and able to assign and accept the assignment of the mortgage. Most knowledgeable attorneys will know offhand which lenders fall under which category and already have an inventory of forms that outline the procedures, contacts, timelines, and fees—they can vary widely from lender to lender.

Assuming the above criteria have been satisfied, it’s always prudent for attorneys to lay out the next steps specifically and diligently with a CEMA analysis to their clients. This analysis should outline the net value by comparing the mortgage tax savings on a CEMA against a normal purchase.

It also must factor additional fees that wouldn’t be involved on a normal purchase, as there also may be instances where the mortgage tax savings would be outweighed by the additional fees—looking at you, Nassau and Suffolk counties. These fees include extra document recordings, bank processing fees, and additional attorneys’ fees.

Timing is another vital factor. CEMAs can take substantial time to complete, and parties will need to consider relevant factors such as expiring leases or interest rate lock expirations.

Attorneys will always want to brace their clients for the possibility of paying the full mortgage tax if there are any issues that may render a CEMA impossible. If there are breaks in the seller’s chain of collateral documentation that can’t be fixed, and the missing documents or signatures can’t be tracked down, the CEMA puzzle can’t be completed.

While mortgage tax is a buyer’s expense, attorneys will also want to explain the incentives to cooperate on the seller side of the transaction. On a purchase CEMA, a seller may also claim a continuing lien deduction on their transfer taxes (a closing cost typically allocated to sellers).

Taking it a step further, a sharp seller’s attorney will also negotiate a closing credit for a portion of the buyer’s savings as the cost of doing business. In doing so, it’s highly recommended to have the contract of sale between buyer and seller specifically itemize each cost that will be included in the savings calculations, to help avoid any disagreements at closing.

Despite the potential risks, a CEMA is a great option to save money in New York—as long as all the puzzle pieces fit together.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Scott Krinsky is a partner and manager of the Romer Debbas residential banking and financing department, serving as counsel to more than 30 lending institutions and private banks.

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