Whenever you obtain a mortgage, some state and local governments levy a mortgage recording tax to document the loan transaction. This fee is separate from mortgage interest and other annual property taxes. Since it is state-imposed, the mortgage recording tax must be paid to the relevant government when you register a mortgage.
Consider working with a financial advisor to help ensure that all relevant taxes and fees associated with your real estate transaction have been properly recorded.
Does Your State Charge a Mortgage Recording Tax?
There are seven states currently charging mortgage recording taxes: Alabama, Florida, Kansas, Minnesota, New York, Oklahoma and Tennessee. Rates vary from state to state. At the low end are states like Tennessee where the tax is $0.115 per $100 of mortgage principal, with the first $2,000 exempt.
At the high end are states like New York and municipalities like New York City. The city levies a 1.8% tax on mortgages less than $500,000 and 1.925% on mortgages greater than $500,000. These amounts include a New York state levy of 0.5%.
How to Calculate Your Mortgage Recording Tax
Calculating your mortgage recording tax is relatively straightforward. Take the principal of your mortgage, which is the total amount you are borrowing from a lender, and divide it by 100. Next, round up the quotient to the nearest whole number. Take the result and multiply it by your state’s specific mortgage recording tax rate. Finally, check for allowances. In some states, you can deduct an allowance from the computation, so be sure to review local laws.
Visit your state’s Department of Taxation and Finance to obtain mortgage recording tax forms. Note that mortgage tax rates may vary within a state’s various counties or cities, so you should check in with your local jurisdiction.
You cannot deduct the amount paid for your mortgage recording tax when you file with the IRS. You can, however, add this amount to the cost basis of your property. If and when you sell, you will benefit from the added value.
How to Save
For those of you seeking ways to save money on refinancing, consider a mortgage assignment. In this instance, the original mortgage recording tax is transferred, along with the mortgage account and all of its interest, to the new lending company. It will then revise and reissue the mortgage to the borrower.
In New York State, for example, this process is called Consolidation, Extension & Modification Agreement (CEMA). Some lending companies will not participate in an assignment transfer. And when they do, the borrower must partake in a critical juggling act, obtaining consent from the old and new lender to participate. A CEMA adds to the second lender’s workload, since the filing process — along with all of its calculations — is more complicated. For this reason, borrowers typically pay an upfront processing fee to enroll. Crunch the numbers and determine if a mortgage assignment will help you save some money.
It is important to note that any mortgage recording tax should be paid off in a timely manner. States will impose monthly penalty fees and can even place a floating rate of interest on any unpaid document. In many cases, late penalties are also enforced. For example, the State of Florida will tack a penalty equaling 10% of the amount owed (not to exceed 50%), combined with a monthly floating interest rate for outstanding tax balances.
The Bottom Line
There are seven states in which you will have to pay a mortgage recording tax if you take out a mortgage or refinance a property. These states are Alabama, Florida, Kansas, Minnesota, New York, Oklahoma and Tennessee. One way to avoid this tax is to buy the property in an all-cash deal. Another way is to buy in a county of one of these seven states that doesn’t also charge this tax so you don’t end up paying the tax to two different entities, the state and the local jurisdiction.
Tips on Taxes
- If you are taking out a mortgage in one of the seven states with a mortgage recording tax it’s wise to work with a financial advisor to help ensure you are handling things properly. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use our no-cost property tax calculator to help you understand your tax rate and the average costs of property taxes in your area.
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