Bulletin: NY000238

New York State issued Technical Service Bulletin TSB-M-04(9)R on November 22, 2004 to provide guidance to the application of Chapter 60 of the Laws of 2004. The bulletin can be accessed at www.nystax.gov. If you cannot access this, call for a copy.

Wrap Mortgages

"A wrap mortgage provides that the indebtedness secured by the lien of the [wrap] mortgage includes outstanding principal balance of one or more other mortgages."

The new law, Chapter 60 of the Laws of 2004, as written, taxed a wrap mortgage in the City of New York on the full new principal, which included the existing mortgage.

Under the bulletin issued, mortgage tax will be due only when the underlying mortgage is refinanced, increased, or a new mortgage is taken out to be wrapped, EVEN IF THE FACE OF THE WRAP MORTGAGE REMAINS THE SAME.

The memo gives examples which explain this in depth.

Spreaders

If a mortgage is spread onto a new property and released from the old property, a mortgage tax will be due on the amount of the mortgage spread, as it is a new indebtedness on the new property.

The tax can not be avoided by having the owners of both properties form a new entity, which then takes title to both properties, executes a spreader agreement, and coveys the property back to the original owners.

There is also a rebuttable presumption that a transfer to a related party is for tax avoidance.

A related party is:

family member
any entity where one party has a 25% interest
entities owned or controlled by the same party
a grantor of a trust and the trust

A mortgage given to secure additional collateral will not be taxed if the property mortgaged as collateral is owned by the same person, or an entity that is at least 50% owned by the original mortgagor,

A collateral mortgage on property owned someone other than the original mortgagor will not be taxed provided the original mortgagor is not released from the note.

The Section 255 affidavit for a spreader which qualifies for reduced mortgage tax must also state:

The mortgagor/obligor named under the primary recorded mortgage will not be released from the evidence of the indebtedness secured by the mortgage and replaced by the mortgagor and the mortgagor's property identified in the instrument used to spread the lien of such primary recorded mortgage.