Section 255 Mortgage Recording Tax Exemption in New York

The Section 255 mortgage recording tax exemption in New York lets you avoid paying mortgage recording tax a second time on debt you already paid tax on. It is the statutory basis under Section 255 of the New York Tax Law for the savings borrowers see in a Consolidation, Extension, and Modification Agreement (CEMA): when you refinance or modify an existing mortgage, tax is owed only on the “gap” between your old unpaid balance and the new loan, not on the full new loan amount.¹

That matters because New York’s mortgage recording tax is steep. In New York City the combined rate reaches 1.8% on mortgages under $500,000 and 1.925% on mortgages of $500,000 or more.² On a seven-figure refinance, Section 255 routinely saves tens of thousands of dollars.

What Section 255 Actually Exempts

The statute exempts a supplemental or additional mortgage from the recording tax when it is recorded for one of three purposes: to correct or perfect an already-recorded mortgage on which all tax has been paid; to act pursuant to a provision or covenant in a recorded mortgage; or to impose a lien on property not originally covered, in order to secure the same principal indebtedness.³

The logic is simple. If you already paid tax on a debt, a later instrument that continues that same debt should not be taxed again. The exemption has one hard limit: any portion of the supplemental instrument that creates “new or further indebtedness” beyond the original mortgage is taxable under Section 253.¹

How a CEMA Uses the Exemption

A CEMA is the standard way borrowers claim Section 255. Rather than discharging the old mortgage and recording a new one, your existing lender assigns its mortgage to the new lender. The new lender then consolidates the assigned mortgage with a “gap mortgage” into a single loan. Because the consolidation is treated as a supplemental instrument recorded pursuant to a covenant in the existing mortgage, tax is due only on the gap — the new money being advanced.⁴

Everything depends on the existing lender agreeing to assign. If the current lender refuses, the CEMA cannot proceed and the full new loan amount is taxable.⁴ Most institutional lenders cooperate but charge for the extra work: roughly $500 to $750 per lender, plus around $500 in recording fees, usually totaling about $1,500 to $2,000 in CEMA-specific costs on top of standard closing expenses.⁵

A Dollar Example

Say you are refinancing a $1 million mortgage in a jurisdiction with a combined 2.8% mortgage recording tax rate. Without a CEMA, tax applies to the full $1 million. If your existing balance is $800,000 and the new loan is $1 million, a CEMA limits the tax to the $200,000 gap. That is a $22,400 difference, well above the processing fees.

Purchases, Not Just Refinances

CEMAs are not limited to refinances. In a purchase, the buyer’s lender can take an assignment of the seller’s existing mortgage and consolidate it with a purchase-money loan, cutting the buyer’s mortgage recording tax down to the gap between the new loan and the seller’s remaining balance. This requires seller cooperation and extra paperwork, and the parties sometimes negotiate how to split the savings.

Where the Exemption Does Not Apply

Section 255 looks generous but carves out several situations where tax is still owed.

New Money

Any debt beyond the unpaid principal of the original mortgage is taxable. In a CEMA this is the gap amount, and it is always subject to tax under Section 253.¹

Spreading Agreements in New York City

In cities of one million or more (effectively New York City), a spreading agreement or additional mortgage that imposes a lien on property not covered by the original mortgage is taxable unless the additional property is owned by the same mortgagor who owned the originally encumbered property.³ The statute includes an anti-avoidance rule: if the property was transferred to a related party within the 12 months before recording, the transfer is presumed to be for tax avoidance, rebuttable only by clear and convincing evidence of an independent business or financial purpose. “Related” here uses a 25% ownership-or-control threshold, stricter than the 50% threshold applied elsewhere in Section 253-a.¹

County Tax Suspension Mismatches

If the original mortgage was recorded in a county that had suspended its local mortgage recording tax, and the supplemental mortgage adds property in a county where the tax is in effect, the exemption does not apply to that county-level tax.³

Claiming the Exemption: The Section 255 Affidavit

You claim the exemption by filing a sworn affidavit, commonly called a Section 255 affidavit, with the county recording officer when the supplemental mortgage is recorded. Under 20 CRR-NY 645.3, the affidavit is filed in duplicate and may be executed by the mortgagor, the mortgagee, or any other person with knowledge of the facts.⁶

The affidavit must set out:

The mortgagor(s) and mortgagee(s) on both the prior and supplemental mortgages.
The execution date, recording date, and liber and page number of the prior primary mortgage.
The principal debt secured, or that could have been secured, by the prior mortgage when it was executed.
The total mortgage recording taxes paid when the prior mortgage was recorded.
The unpaid principal balance of the prior mortgage as of the date the supplemental mortgage is executed.
A description of the supplemental mortgage, why it qualifies as supplemental, and the principal debt it secures.
The amount of any new indebtedness beyond the unpaid balance of the prior mortgage.
The amount of any new funds advanced or readvanced.
The maximum principal that is or could be secured by the supplemental mortgage under any contingency.⁶

Some counties publish additional checklists. The Ulster County Clerk, for example, requires the affidavit to list the date, parties, recording information, and maximum indebtedness for each prior mortgage, confirm that no reloans or readvances have been made since the original maximum was reached, and include a formal request for the exemption.⁷

If the supplemental mortgage was already recorded and the tax paid before anyone claimed the exemption, the same affidavit information must be submitted to the New York Department of Taxation and Finance with a refund application.⁶

Where Borrowers Lose the Exemption: The Katz Rules

Courts and the Tax Appeals Tribunal read Section 255 strictly against the taxpayer. In Matter of Scott and Krystyna Katz (2016), the Tribunal denied the exemption to borrowers who achieved the same economic result as a CEMA but papered the deal as a new, independent mortgage rather than a consolidation of the existing one.⁸

Two requirements drove the ruling. First, the supplemental mortgage must be recorded after the prior mortgage was recorded and before it is discharged or satisfied. If the old debt is extinguished and a new one created, the transaction is fully taxable no matter what the borrower intended. Second, the supplemental mortgage instrument itself must reference the prior recorded mortgage. A reference on a HUD-1 settlement statement or in third-party correspondence does not count. The Tribunal also rejected the argument that recording-office backlogs could excuse missing the chronological requirement.⁸

The practical takeaway: if your closing attorney discharges the old mortgage before the new one is recorded, or forgets to include a cross-reference in the mortgage document itself, you can lose the entire exemption even though the economics were identical to a valid CEMA.

Not To Be Confused With Judiciary Law Section 255

If a search for “Section 255” turns up a statute about court clerks searching files and certifying records, that is Section 255 of the New York Judiciary Law, a different provision with the same section number.⁹ It has nothing to do with mortgage recording tax.

1
New York State Senate. Tax Law Section 255 – Supplemental Mortgages
2
New York State Senate. Tax Law Section 253
3
FindLaw. NY Tax Law Section 255
4
NY Department of Financial Services. OGC Opinion No. 08-04-17
5
Rocket Mortgage. CEMA
6
Cornell Law Institute. 20 CRR-NY 645.3
7
Ulster County Clerk. Section 255 Requirements
8
NY Division of Tax Appeals. Matter of Katz, DTA No. 826511
9
New York State Senate. Judiciary Law Section 255