A prior owner financed a building through an Islamic-finance (Ijara/lease-to-own) structure, deeding the property to a lender's special-purpose entity as security instead of using a conventional mortgage, and paying Mortgage Recording Tax (not RETT) on that deed. I'm now buying the building and financing part of the price by having that lender's entity assign the security deed to my new bank, then consolidating it with an additional mortgage into one new mortgage. Do I owe extra Real Estate Transfer Tax or Mortgage Recording Tax on the deed assignment and consolidation, beyond what's already been paid?

Plain-English summary

In 2001, real estate in Queens was conveyed to an owner ("YR"), with RETT paid at that time. In 2006, YR conveyed the property by deed to "DB202," a special-purpose entity owned by an Islamic finance bank ("Bank 1") that structures secured lending in a manner consistent with Islamic law's prohibition on conventional interest. Rather than a mortgage, YR and DB202 used an "Operating Ijara Agreement" — a lease under which YR paid DB202 rent economically equivalent to principal-and-interest payments on a mortgage loan — paired with a purchase agreement obligating DB202 to reconvey the property to YR once YR paid a $4.9 million purchase price in installments over 25 years (the same amounts as the "rent"). YR kept all the practical burdens and benefits of ownership (maintaining, insuring, and paying costs on the property). YR paid Mortgage Recording Tax on this arrangement rather than RETT.

The petitioner then contracted to buy the property from YR for $8.2 million (paying RETT on that purchase), financing $6 million of the price through a new lender, "Bank 2." As security, DB202 would assign its 2006 security deed to Bank 2, and the petitioner would sign an additional $1.1 million mortgage, consolidating the assigned deed with that new mortgage into a single new instrument securing $6 million total.

The Department first confirmed, following its own prior ruling in the Ahli United Bank matter (TSB-A-08(2)R) on nearly identical Ijara-style facts, that the 2006 deed genuinely functioned only as loan security under Tax Law §1405(b)(2) — the grantor never relinquished control or the practical incidents of ownership, and any eventual reconveyance would just represent satisfaction of the secured debt, not a real sale. On the specific questions asked: (1) assigning that security deed to Bank 2 as the new lender triggers no additional RETT or MRT, because both immediately before and after the assignment, the deed serves solely to secure the same bona fide, still-outstanding debt — nothing about the underlying obligation changes, and Real Property Law §275 / Tax Law §258 don't bar recording the assignment since the debt hasn't been paid off; (2) treating the assigned deed as (or consolidating it into) a mortgage, and increasing the secured debt, is permissible, but MRT is due on that increase; and (3) critically, that MRT liability is LIMITED to the amount of NEW or additional debt — the supplemental-mortgage rules (Tax Law §255.1(a); 20 NYCRR §645.1(a)) let an instrument that continues securing the same principal debt be recorded MRT-free, with tax owed only on genuinely new indebtedness layered on top, consistent with case law (City of New York v. State Tax Commission; Matter of Rednow Realty Corp. v. Tully; City of New York v. Procaccino) holding that consolidating an existing secured debt into a new instrument, without adding new principal, doesn't trigger fresh MRT on the whole amount.

What this means for you

Assigning a deed-as-security instrument to a new lender is a tax-free administrative step, not a new conveyance

If a deed was recorded purely as loan security (common in Islamic-finance/Ijara structures, but also in conventional deed-in-lieu financing arrangements), transferring that security interest from one lender to another isn't a taxable RETT conveyance or a fresh MRT event, as long as the underlying debt is still outstanding and unchanged.

Refinancing or consolidating existing secured debt only taxes the NEW money

When you take over or restructure an existing security instrument and add new financing on top, MRT applies only to the incremental new debt amount, not the full consolidated balance — as long as the instrument continues to secure the same original principal obligation.

Deed-as-security structures need to genuinely function as financing, not disguised sales, to get this treatment

The favorable RETT treatment throughout this ruling depends on the deed being a real financing device -- the grantor retaining control, benefits, and burdens of ownership, with reconveyance tied to debt repayment rather than to a separate sale transaction. A deed transfer that doesn't preserve those features risks being treated as an actual conveyance instead.

Common questions

Q: If a lender assigns a security deed (rather than a conventional mortgage) to another lender, does that trigger RETT as if the property were being sold?
A: No -- as long as the deed continues to serve solely as security for the same, still-outstanding debt both before and after the assignment, it's not treated as a taxable conveyance.

Q: If I add new financing on top of an assumed or assigned security instrument, is MRT calculated on the whole new loan amount or just the increase?
A: Only on the increase. Under the supplemental-mortgage rules, MRT is due only on the amount of debt genuinely added beyond what the original instrument already secured.

Q: Does this favorable treatment only apply to Islamic-finance (Ijara) structures?
A: No -- while this ruling and its cited precedent (Ahli United Bank, TSB-A-08(2)R) both arose from Ijara financing, the underlying legal principle (Tax Law §1405(b)(2)'s exemption for conveyances used to secure debt, and the supplemental-mortgage rules) applies more broadly to any deed genuinely used as loan security.

Citations and references

Statutes, guidance, and case law:

• Tax Law §1405(b)(2)
• §275 of the Real Property Law
• §258 of the Tax Law
• §255.1(a) of the Tax Law
• §645.1(a) of the Mortgage Recording Taxes Regulations
• TSB-A-08(2)R (Ahli United Bank (UK) PLC)
• City of New York v. State Tax Commission, 130 A.D.2d 890 (3d Dept. 1987)
• Matter of Rednow Realty Corp. v. Tully, 72 A.D.2d 621 (3d Dept. 1979)
• City of New York v. Procaccino, 46 A.D.2d 594 (3d Dept. 1975)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_2010.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a10_3r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-10(3)R
Real Estate Transfer Tax
Mortgage RecordingTax
June 16, 2010

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M100218B

The petition asks whether a deed recorded as security for the repayment of debt, can be assigned to
another lender, without payment of additional real estate transfer tax (RETT) or mortgage recording tax
(MRT). We conclude that it can. The petition also asks whether such an assigned deed can be treated as a
mortgage and modified by increasing the amount of the debt that is secured and by changing the form of the
security instrument to a mortgage. We conclude that this is permissible, subject to payment of RETT and/or
MRT. Further, the petition asks if the mortgage recording tax upon the assignment is limited to the
additional or new debt secured by the modified mortgage. We conclude that the tax is so limited.
Facts
The following is a summary of facts submitted by Petitioner as the basis for this Advisory Opinion.
In 2001, name reacted conveyed real estate in Queens County to name redacted. (YR). RETT was paid upon
recording the deed. The real estate in question is designated as name redacted (the Premises).
2006 Agreements: In 2006, YR conveyed the Premises via deed to name redacted (DB202).
According to the petitioner, DB 202 is a special purpose entity owned by name redacted (Bank 1), a financial
institution that lends money to entities and obtains security for these loans in a manner that does not violate
Islamic law. YR did not pay RETT, but instead paid MRT to secure a debt of $4,900,000. Simultaneously
with the delivery of the deed to DB202, YR and DB202 entered into two agreements.
The first agreement, entitled “Operating Ijara Agreement” is in the form of a lease. The agreement
obligated YR to pay rent to DB202 equivalent to payments that would be due to a lender under a mortgage
loan. YR agreed to maintain the premises, keep it insured and pay all costs relating to operating the property.
A memorandum of lease was recorded summarizing this agreement. An assignment of leases and rents was
also recorded to secure payment of the indebtedness and “performance of any and all obligations of grantor
under the Ijara agreements, this assignment and the related documents.”
The parties also entered into a purchase agreement whereby DB202 agreed to reconvey the property
to YR upon payment of a $4,900,000 purchase price, and YR was obligated to pay the purchase price in
installments over 25 years. The installment payments were the rent payments owed under the Operating Ijara
Agreement.
2009 Agreement: In November, 2009, name redacted (Petitioner) entered into a purchase and sale
contract with YR. Petitioner agreed to purchase the premises for $8,200,000. RETT will be paid on this
amount.
To finance the purchase, Petitioner will borrow $6,000,000 from name redacted (Bank 2) as
evidenced by a promissory note and secured by a first mortgage on the premises. As security, DB202 will
assign the deed to Bank 2. Petitioner will secure the note with an additional mortgage of $1,100,000 on the
Premises. Petitioner will sign an agreement that consolidates the assigned deed with the additional mortgage
to form a new mortgage securing a debt of $6,000,000.

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TSB-A-10(3)R
Real Estate Transfer Tax
Mortgage RecordingTax
June 16, 2010

Analysis
In Ahli United Bank (UK) PLC, TSB-A-08(2)R, the Department provided advice concerning facts
and agreements similar to the 2006 agreements described in this Petition. The Department advised that,
pursuant to Tax Law §1405(b)(2), conveyances that are or were used to secure a debt are exempt from
RETT. In a manner similar to the Ahli matter, the 2006 agreements make it clear that the grantor did not
intend to relinquish its control of the property and continued to enjoy the benefits and responsibilities of
ownership. The monthly lease payment is equivalent to a principal and interest payment in a conventional
mortgage loan. At the end of the lease or when the principal is repaid, whichever occurs first, the property is
deeded back to the original grantor. In this case, the conveyance of the fee interest at the end of the lease
represents the satisfaction of the instrument securing the debt or obligation. These transactions are entered
into solely to effect and secure DB202’s financing of the real property. Petitioner now has signed a contract
to purchase the premises by assignment of deed, together with financing consisting of consolidation of the
assigned deed with an additional mortgage securing the debt.
Petitioner asks whether a deed recorded as security for the repayment of debt can be assigned to
another lender, without payment of additional real estate transfer tax (RETT) or mortgage recording tax
(MRT). Before and immediately after the assignment of the deed to the new lender, the deed serves solely to
secure a bona fide indebtedness. The facts of this Petition demonstrate that the deed, serving as a financing
agreement, and the associated debt have not become due and payable and paid in full so as to prevent the
recording of the assignment to the new lender under §275 of the Real Property Law. Under the unique facts
presented in this Petition, the deed remains, before and immediately after the assignment of the deed to the
new lender, a financing agreement upon which the proper taxes had been paid, free of the enforcement
provisions of §258 of the Tax Law.
Section 275 of the Real Property Law and §258 of the Tax Law would not prevent the recording of
the assignment of the mortgage and the underlying note to the new lender. Once the assignment is recorded,
an instrument that is considered a supplemental mortgage with respect to the mortgage, as set forth in
§255.1(a) of the Tax Law and as defined in §645.1(a) of the Mortgage Recording Taxes Regulations, can be
recorded without further payment of mortgage recording taxes, unless that instrument creates or secures a
new or further indebtedness other than the indebtedness secured by the mortgage. Based upon the facts set
forth in this Petition, we conclude that the mortgage, as assigned to the new lender (i.e., Bank 2), at all times
continues to secure the same principal debt or obligation as secured immediately before the consummation of
the transactional steps described in this Petition. Because the mortgage continues to secure the same principal
debt or obligation, the recording of a supplemental mortgage, either simultaneously with or subsequent to the
recording of the assignment of the mortgage, as described in this Petition, would be taxable only to the extent
the supplemental mortgage secures an amount in addition to the unpaid principal debt or obligation secured
by the mortgage that is assigned to the new lender.
The Petition also asks whether the assigned deed can be treated as a mortgage and modified by
increasing the amount of the debt that is secured and by changing the form of the security instrument to a
mortgage. We are limiting our response to the question whether mortgage recording tax is due here. Once a
mortgage has been given and recorded, the recorded primary mortgage may be changed by a supplemental
mortgage and no additional mortgage recording taxes will be due as long as the amount secured remains the
same. See City of New York v. State Tax Commission, 130 A.D. 2d 890, 891 (3d Dept., 1987). If the
indebtedness secured by a lien is reduced or the lien terminated for any reason, tax would be due on any
increase on the new obligation. See Matter of Rednow Realty Corp. v. Tully, 72 A.D. 2d 621, 622 (3rd Dept.,
1979). In City of New York v. Procaccino, 46 AD2d 594, 364 NYS2d 582 (3d Dept 1975) the Court held
that a supplemental mortgage will be exempt from any additional mortgage recording tax if it involves no

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TSB-A-10(3)R
Real Estate Transfer Tax
Mortgage RecordingTax
June 16, 2010

new principal obligation or mortgage debt but merely consolidates an existing secured debt. Based on our
review of these decisions, we conclude that mortgage recording tax is due based only on the amount in
addition to the unpaid principal debt or obligation secured by the mortgage as assigned to the new lender.

DATED: June 16, 2010

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel
An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion.