Apartment combinations on the rise in NYC

Real Estate Weekly, Jan 19, 2005 by Eric Gonchar

Another serious consideration concerns transfer taxes. While New York City transfer tax is generally a seller's expense, it can be an issue in a unit combination. The Department of Finance taxes the seller of two apartments at the commercial rate rather than the residential rate. Normally, a seller will pay NYC transfer tax at 1.0% of the sales price if under $500,000 and 1.425% of the sales price if $500,000 and over. However, when two units are transferred simultaneously, the transfer tax rate jumps to 2.625%. If the purchaser is acquiring the two apartments from a sponsor, it is important to review the offering plan to determine who is responsible for paying the transfer taxes at closing. Many offering plans place the burden of transfer taxes on the purchaser which can add a substantial closing expense.

There are special considerations if the combination involves condominium apartments. Because condominium apartments have separate tax lots, a decision should be made as to whether the tax lots should be combined when the apartment is combined. This additional step usually requires an amendment to the condominium declaration and an amendment to the offering plan. An amendment to the declaration may require a vote of the unit owners. Once a condo unit is combined into one tax lot, the cost to convert the apartment back into 2 units at a later date may be very difficult. Alternatively, if the units are not combined into one tax lot, the commercial tax rate may apply when the apartment is sold. When financing the purchase of two uncombined units, the New York State Department of Taxation and Finance also taxes the transaction as a commercial transaction.

When a lender makes a loan to a purchaser for the acquisition of a condominium unit, the state imposes a mortgage recording tax. The mortgage tax is calculated at 1.75% of the loan amount in the five New York City boroughs when the loan is under $500,000 and 1.875% of the loan amount if the loan is $500,000 and over.

However, when a purchaser obtains a mortgage on two uncombined apartments, the State treats the acquisition as a commercial transaction and taxes the borrower at 2.75%.

Since mortgage tax is imposed on "real estate" related transaction, the purchaser of uncombined cooperative units will not pay NYC mortgage recording tax when financing the purchase.

While the steps involved to combine apartments may seem fairly cumbersome, the completed project can be very gratifying. It is a way to increase living space as an affordable alternative to moving.