Co-op Buyers Beware: New State Tax May Add Over $5,000 to Closing Costs
March 14, 2010 — New York State's proposed 2010 budget includes a new tax on anyone buying a co-op apartment. Just how much will this new "cooperative loan tax" affect people buying a co-op this year? If passed into law, it'll add anywhere $1,000 to over $5,000 to your costs for a typical co-op loan. And that's just the start of it....
Governor David Patterson's budget proposes that Section 253 of the state's tax law be amended to impose a tax upon the filing of every financing statement by a lender providing financing for the purchase of a co-op apartment. A financing statement provides notice to the world that a lender has funded the purchase of a cooperative apartment and that, as collateral, the purchaser has signed a security agreement giving the lender the right to retain and sell (upon default) the purchaser's stock and lease, subject to the rights of the cooperative corporation.
Currently, no tax is required upon filing this with the state of New York. The amendment would require the payment of a tax with the filing of each financing statement effective 90 days after the bill becomes law.
The cooperative loan tax
will be passed along to you
as the purchaser.
As with most closing fees and costs imposed upon lenders as part of the loan process, the cooperative loan tax will be passed along to you as the purchaser. Determining the actual tax isn't easy. The language of the proposed amendment is ambiguous and needs tweaking, which usually occurs before the bill becomes law.
Assuming that Governor David Patterson is seeking to make taxes equivalent for all residential real estate — the current formal sections are one-, two- and three-family dwellings and individual condominiums — then it would match the current state tax of $1 for each $100 of the loan amount (for loans less than $500,000) and $1.125 for each $100 of the loan amount (for loans equal or greater than $500,000).
So, if you were taking out a loan for $100,000 for the purchase of your co-op apartment, there would be a cooperative loan tax of $1,000, to be paid to the state upon the filing of the financing statement by the lender. If the loan was $500,000, the cooperative loan tax equals $5,625. The tax rate varies by county, amount of loan, and type of property.
Complementary City Tax Likely to Follow
Here's where the "more" part comes in: The amendment also permits local governments to implement a similar tax. In New York City, a mortgage recording tax is currently paid for mortgages filed against property within the five boroughs. The state and city have combined their payments for collection of the tax at closing. The combined rate for one- and two-family residential homes is $2.05 for each $100 of the mortgage loan (for loans less than $500,000) and $2.175 for each $100 of the loan amount (for loans equal or greater than $500,000). The combined rate for one-, two- and three-family homes or, individual residential condominium units is $2.80 for each $100 of the mortgage loan amount (for loans equal or greater than $500,000). Assuming the city follows the state's proposal to implement a cooperative loan tax (highly likely), then your tax rate will be based upon the factors discussed here.
Remember, the governor's proposed budget — required to be approved by the legislature on or before April 15, 2010 — contains many bills that seek to create and/or raise taxes to offset a burgeoning deficit. This proposed cooperative loan tax may not survive the ultimate compromise between legislators on the final budget.
In any event, you can control your own destiny and avoid this proposed tax, by closing before it becomes law.
Mark L. Hankin is a partner in the law firm of Hankin & Mazel .
Adapted from Habitat March 2010. For the complete article and more, join our Archive >>