If a lender holds a mortgage encumbering multiple properties and wants to take title to the properties by separate deeds in lieu, how are the New Jersey Realty Transfer Fee (the “Transfer Tax”) and the buyers tax due under Chapter 33, Laws of 2006 of the State of New Jersey (the “Mansion Tax”) handled?
If the lender discharges the mortgage and there is no other consideration for the transfers, there will be no Transfer Tax or Mansion Tax. However, if the lender wants to keep the mortgage lien open, the Transfer Tax and Mansion Tax must be considered. The total consideration for the transfers is the outstanding balance due under the mortgage. It’s necessary to split this consideration between each deed in lieu. A determination must be made of the relative value of each property being transferred by deed in lieu. This is done by computing the percentage of the assessed value of property in each deed in lieu to the assessed value of all the property being transferred. Those percentages are then applied to the outstanding balance due under the mortgage. For example:
- The mortgage encumbers Property A and Property B.
- The outstanding balance due under the mortgage is $10,000,000.
- The assessed value of all property subject to the mortgage totals $50,000,000.
- Property A has an assessed value of $20,000,000.
- Property B has an assessed value of $30,000,000.
- Property A has 2/5 of the total value and is charged with 2/5 of the consideration, which is $4,000,000.
- Property B has 3/5 of the total value and is charged with 3/5 of the consideration, which is $6,000,000.
- The Transfer Tax due on each deed in lieu is computed based on these figures. A notation should be made in the affidavit of consideration for each deed in lieu explaining the allocation of the consideration between the two deeds in lieu.
Computation of the Mansion Tax must take into account both the value and property classification of each property being transferred in the deeds in lieu. Only properties conveyed for a consideration greater than $1,000,000 and classified as Class 2 (residential), Class 3A (farm land with a structure intended for residential use), Class 4A (commercial other than industrial or apartment), and Class 4C (co-operative units) are subject to the Mansion Tax. Using the example above, if Property A is a house the Mansion Tax will have to be paid on the deed in lieu conveying Property A because the consideration is greater than $1,000,000 and Property A is Class 2 property. If Property B is a factory the Mansion Tax will not have to be paid on the deed in lieu conveying Property B. Although the consideration is greater than $1,000,000, Property B is Class 4A industrial property, and not subject to the Mansion Tax.