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Transfer Tax Loophole
Many homeowners find themselves with a fair market value (“FMV”) on their home that is less than their principal mortgage balance (“underwater”) and no ability to pay their monthly mortgage bill. In New York State many Banks start foreclosure proceedings after homeowners are over twelve months behind on mortgage payments.
Some homeowners would prefer to avoid the cost of litigating the foreclosure action and instead sell their property to a unrelated purchaser and move on with their lives.
The problem that many homeowners face is the simple reality that their home is underwater. Another issue that arises is that the State and City of New York charge transfer tax on the sale of the property, even though it is underwater and the homeowner is losing money on the sale.
Naturally, if homeowners had the money to pay the transfer tax and the mortgage balance they would likely not find themselves in foreclosure.
So, how can a homeowner sell their underwater property and not personally come up with the transfer taxes?
The answer is simply. The bank must be willing to allow the homeowner to sell the property without receiving the outstanding mortgage balance and also pay all the state and city transfer taxes.
Why would the lender be willing to pay the taxes?
The answer lies in the reality that lenders lose on average $70,000.00 in the process of foreclosing on a property and that after winning the foreclosure they are forced to auction off the property. At auction the vast majority of properties sold, receive significantly less than their FMV.
Thus, it is in the Bank’s best interest to allow a short sale provided they receive close to FMV since the costs associated with the transfer is negligible in comparison with the cost of proceeding with a foreclosure.
From here we see that although the law may require that transfer taxes be paid at closing, it is silent by whom. In a short sale scenario, provided the homeowner negotiates carefully, the lender should pay all the transfer taxes and save homeowners thousands of dollars in the process.
Call Balisok & Kaufman, PLLC New York Tax & IRS Lawyers today at 718-928-9607 or email us at Law@BalisokKaufman.comFree Consultation
CIRCULAR 230 DISCLOSURE: Per regulations governing practice before the Internal Revenue Service, any tax advice contained herein is not intended or written for use, and cannot be used, to avoid tax penalties that may be imposed on the taxpayer.