NYS Department of Taxation and Finance Issues Bulletin on Mortgage Recording Tax as it Relates to Interest Rate Swap Agreements
Earlier this year, the New York State Department of Taxation and Finance issued Tax Bulletin MR-30 titled “Application of the Mortgage Recording Tax to Breakage Costs Secured Under Interest Rate Swap Agreements.” The Bulletin sets outs conditions that must be met so that swap agreement breakage costs will not be subject to mortgage recording tax.
New York law requires that a tax be paid on the recording of a mortgage, which is based on the amount of “principal debt or obligation” secured by the mortgage. Generally, the amount of principal debt or obligation does not include interest payable on the indebtedness secured by the mortgage or “incidental amounts” (typically amounts expended by the lender to preserve the property’s value or to protect the validity of its lien, such as property taxes and insurance premiums).
Swap agreements typically require the borrower to pay “breakage costs” in certain situations and lenders want that obligation to be secured by the mortgage. The Department had not previously issued any formal opinion on whether mortgage taxes are due on breakage costs. Title insurers have been issuing additional interest endorsements insuring against any loss or damage to a lender as a result of a determination that “additional interest” (the appropriate characterization of breakage costs) is not covered by the insured mortgage.
With the Bulletin, the Department has settled this outstanding issue by providing a formal opinion that if all of the following conditions are met, breakage costs will be considered “incidental amounts” (i.e. not part of the principal debt secured and, therefore, not subject to mortgage tax):
- The breakage costs are included in the mortgage as part of the secured obligation and are defined as “additional interest;”
- The swap agreement relates to the same loan the mortgage secures and not, for example, another unsecured loan; and
- The notional amount of principal under the swap agreement is the same as the principal amount secured by the mortgage.
Breakage costs will be subject to mortgage recording taxes if the conditions above are not met, or if the breakage costs are quantified in a separate mortgage that secures the breakage costs as a separate and distinct obligation which would result in those costs being considered principal and therefore subject to tax.
If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any member of the Financial Institutions & Lending Practice Area.