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Volume 9 - Opinions of Counsel SBEA No. 2

Opinions of Counsel index

Veterans exemption (purchase) (refinanced mortgage) - Real Property Tax Law, § 458:

The use of eligible funds to reduce the principal of a refinanced mortgage attributable to the original purchase money mortgage constitutes a “purchase” for purposes of section 458.

We have been asked whether a veteran’s use of eligible funds to reduce a refinanced mortgage constitutes a “purchase” for purposes of the veterans exemption (RPTL, §458).

Section 458 of the RPTL has long provided a partial exemption to real property owned by a veteran and purchased with eligible funds. The term “purchase” is not statutorily defined in section 458. We have, however, interpreted the “purchase” of real property to include the use of eligible funds to directly purchase or improve property or to reduce the principal on certain kinds of mortgages directly related to the actual acquisition or improvement of real property. Specifically, we have concluded that the reduction of mortgage principal constitutes a purchase only in the case of either a purchase money mortgage, that is, a mortgage assumed at the actual time of purchase, or a home improvement mortgage (4 Op.Counsel SBEA No. 29).

A purchase-money mortgage is generally defined as a mortgage executed at the time of the purchase of the property and contemporaneously with the acquisition of the legal title, or afterwards, but as a part of the same transaction, to secure an unpaid balance of the purchase price (Szerdahelyi v. Harris, 67 N.Y.2d 42, 490 N.E.2d 517, 499 N.Y.S.2d 650 (1986) (citing, Boies v. Benham, 127 N.Y. 620, 28 N.E. 657 (1891) and 38 N.Y.Jur., Mortgages and Deeds of Trust, §7); Syracuse Savings and Loan Association v. Hass, 134 Misc. 82, 234 N.Y.S. 514 (Sup.Ct., Onondaga Co., 1929)). A refinanced mortgage, since it is executed after legal title is obtained, is not a purchase money mortgage. Accordingly, in 3 Op.Counsel SBEA No. 83, we concluded that eligible funds applied toward a refinanced mortgage could not be the basis of a veterans exemption.

In discussing the various financial activities of the veteran in that Opinion, we used the phrase “refinanced mortgage” in a most general sense. The refinanced mortgage under consideration here is one of many which took place in the mid-1980s following a sharp decline in interest rates. That decline prompted many property owners to refinance their mortgages at much more favorable rates than had been available for the previous several years. Because of this mortgage market activity, we think it necessary to review the issue.

Upon reexamining this issue, we believe that 3 Op.Counsel SBEA No. 83 should be modified insofar as it relates to refinanced mortgages. As noted previously, it is the reduction of only the principal of the kinds of mortgages previously enumerated which constitutes a purchase for purposes of the veterans exemption. The reduction of principal relates to the acquisition of the property, whereas the interest is merely payment for the use of the mortgagee’s money. Therefore, the fact that a veteran refinances his original purchase money mortgage to take advantage of lower interest rates should not, in our opinion, affect his or her continued eligibility for exemption. Accordingly, it is our opinion that a refinanced mortgage, to the extent that it refinances the remaining principal balance of the original purchase money mortgage should be treated as a substitute for the original purchase money mortgage. As such, the use of eligible funds to reduce the principal of the refinanced mortgage attributable to the original purchase money mortgage on the property should be considered a “purchase” for purposes of the veterans exemption.

For example, assume that a veteran who executed a purchase money mortgage in the amount of $10,000 reduced the principal thereon to $6,000, partly through the use of $3,000 in eligible funds. Thereafter, the veteran refinances his mortgage in the amount of $12,000. In our opinion, $6,000 out of the $12,000 principal on the refinanced mortgage should be considered a substitute for the original purchase money mortgage. The veteran may still, therefore, “purchase” the property by using additional eligible funds to reduce the $6,000 principal attributable to the original purchase money mortgage. Naturally, the amount of the exemption granted may not exceed the $5,000 statutory maximum (but see, §458(5) which authorizes pro rata veterans exemptions in certain municipalities). Thus, in this example, the veteran may apply up to an additional $2,000 in eligible funds to “purchase” the property.

July 19, 1988

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