All prospective buyers of real property in New York City should be aware of the hefty tax that is charged when mortgages for property in New York City are recorded. New York State charges a mortgage recording tax of 0.5% of the loan, while purchasers in New York City pay a total of 1.8% on loans under $500,000 (New York State mortgage tax included) and 1.925% for those at or above $500,000 (New York State mortgage tax included). Thus, mortgage recording tax is one of the largest closing costs a buyer of real property in New York City will incur in connection with their purchase. However, attorneys at Adam Leitman Bailey, P.C. routinely find ways to reduce mortgage recording tax and save clients tens of thousands of dollars in closing costs, chief among them being the “Purchase CEMA.”
A Purchase Consolidation Extension and Modification Agreement, commonly referred to as a “CEMA,” is a well-known process among experienced real estate professionals that allows purchasers of real property to reduce their mortgage recording tax.
The mechanics of a Purchase CEMA are fairly straightforward: the seller of real property assigns their existing mortgage to a purchaser upon closing. As a result, the buyer is required to pay mortgage recording tax only on any “new money” (i.e. loan proceeds to the buyer that exceed the seller’s principal balance being assigned), rather than the total amount the buyer is financing in connection with the purchase. The result is what every purchaser of real estate wants to hear: lower closing costs and substantial savings.
The following is a basic example illustrating the significant savings Adam Leitman Bailey, P.C. routinely realizes for clients:
- Sales price: $2,000,000
- Seller’s unpaid mortgage principal: $1,000,000
- Buyer’s total financing: $1,500,000
- Mortgage recording tax with CEMA: $9,595 (based on $500,000 “new money”)
- Mortgage recording tax without CEMA: $28,845 (based on $1,500,000)
- Total savings: $19,250
When searching for the right home, buyers are encouraged to check the New York City Automated City Register Information Systems (ACRIS) to determine whether a particular property has a recorded mortgage, and if so, when and for how much it was recorded. This allows buyers to estimate potential savings on mortgage recording tax prior to negotiating an offer to purchase a specific property.
In addition to reducing mortgage recording tax, a Purchase CEMA also has the potential to significantly reduce a seller’s transfer taxes by taking advantage of the “continuing lien deduction” whereby the seller may only have to pay transfer taxes on the amount of “new money,” not the full sale price.
The following is a basic example illustrating the significant savings Adam Leitman Bailey, P.C. routinely realizes for clients:
- Sales price: $2,000,000
- Seller’s unpaid mortgage principal: $1,000,000
- Buyer’s total financing: $1,500,000
- New York State/New York City Transfer Tax with CEMA: $18,250 (based upon $1,000,000)
- New York State/New York City Transfer Tax without CEMA: $36,500 (based upon $2,000,000)
- Total savings: $18,250
It is important to note that while closing costs can be substantially reduced for both buyers and sellers by utilizing a Purchase CEMA, such transactions have additional layers of complexity. For example, certain types of property (e.g. co-operatives) are not eligible, not all lenders agree to participate in a Purchase CEMA, not all assignments allow sellers to reduce transfer taxes, and lenders for both parties to the transaction usually charge additional fees to accommodate the Purchase CEMA.
Accordingly, buyers and sellers seeking to significantly reduce closing costs are strongly encouraged to consult with attorneys and real estate professionals that have substantial experience handling Purchase CEMAs.
Prepared by Andrew Jorges of Adam Leitman Bailey, P.C.
