Whenever you obtain a mortgage, state and local governments enforce 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 government when you register a mortgage.
Find out now: What will happen to my taxes after buying?
Does your state charge a mortgage 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. The low end being states like Tennessee, where the tax is $0.115 per $100 of mortgage principal, with the first $2,000 exempt. The high end includes states like New York State, with a basic tax of $0.50 per $100 of mortgage principal, with additional taxes of $.025 – $1.25 per $100 of mortgage principal based on special conditions. The Tax Policy Center has outlined all existing deed transfer tax and mortgage tax rates as of 2006.
How to calculate your mortgage 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 in order to obtain mortgage recording tax forms. Note that mortgage tax rates may vary within a state’s various counties and/or cities, so you should check in with your local jurisdiction.
Let’s look at a $300,000 mortgage loan taken within the State of Alabama, with a 0.15% mortgage tax rate:
Pretty straightforward, huh? 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, this process is called Consolidation, Extension and Modification. 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.
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