We're modifying a mortgage so that accrued-but-unpaid interest gets deferred and paid as a fixed lump sum at maturity, without bearing its own interest and without being added to the principal balance. Does that modification trigger additional mortgage recording tax?

Plain-English summary

This ruling, later cited directly in the Department's 1993 Coliseum Hotel Associates workout opinion (TSB-A-93(19)R), draws a precise line between deferred interest that stays "interest" for mortgage recording tax purposes and deferred interest that quietly converts into new, taxable principal. Ticor Title Guarantee Company asked about a mortgage being modified so that accrued-but-unpaid interest would be deferred and paid as a fixed sum at maturity — critically, that deferred amount would NOT bear its own interest going forward, and would NOT be added to the mortgage's principal balance.

The Department confirmed no additional mortgage recording tax was due, but explained the analysis by contrasting two prior rulings that reached the OPPOSITE conclusion on different facts. A 1909 Attorney General opinion held that where a mortgage lets interest go unpaid but the amount due at maturity is compounded (interest calculated on interest), the tax must be computed on the full compounded sum — because economically, "the substance of the transaction was as if the interest had been actually paid to the mortgagee and the mortgagee then loaned the same amount back to the mortgagor." Similarly, in TSB-A-91(5)-R (Napoli), the Department held that once additional interest is allowed to accrue ON unpaid interest, that interest "loses its character as interest" and becomes part of the taxable principal indebtedness. Here, by contrast, the modification simply extended the DUE DATE for paying already-accrued interest, fixed that amount, and made clear it would never compound or merge into principal — so it "does not create or secure a new or further indebtedness or obligation other than the principal indebtedness... secured by the recorded primary mortgage," qualifying as a tax-free "supplemental mortgage" under Tax Law § 255.1(a).

What this means for you

Lenders and borrowers deferring interest payments in a loan modification

If you want to defer accrued interest without triggering new mortgage recording tax, structure the deferral as a FIXED sum payable at a future date (like maturity), explicitly stating it will NOT bear additional interest and will NOT be added to the principal balance. Get that language precisely right — it's the entire basis for the tax-free treatment.

Title insurance companies and closing attorneys reviewing loan modifications

Read any interest-deferral provision carefully for compounding language. A modification that lets deferred interest accrue its own interest, or folds it into principal, converts what looks like a simple payment-timing change into new taxable indebtedness under the 1909 Attorney General opinion and TSB-A-91(5)-R (Napoli) — exactly the outcome this ruling shows how to avoid.

Workout lenders and borrowers in loan restructurings

This ruling is a frequently-cited building block in more complex workout scenarios — see TSB-A-93(19)R (Coliseum Hotel), which relies on this exact deferred-interest principle as one of several rules combined in a multi-step hotel financing workout.

Common questions

Q: Does deferring accrued interest to a later payment date always avoid new mortgage recording tax?
A: Only if the deferred amount is fixed, doesn't bear its own interest, and isn't added to principal. If any of those conditions fail -- especially if the deferred interest compounds -- it can convert into new taxable principal.

Q: What's the difference between this ruling and a compounding-interest mortgage?
A: Here, the deferred interest stays a fixed, non-compounding amount payable at maturity -- ordinary deferred interest. In a compounding scenario, unpaid interest itself starts earning interest, which the Department treats as functionally equivalent to paying off the interest and re-lending the same amount, converting it into new principal.

Q: Can another lender or title company rely on this specific ruling?
A: No. It binds the Department only as to this petitioner and the described modification, though the underlying distinction (deferred vs. compounded interest) is a generally applicable principle the Department has since applied in other rulings, including TSB-A-93(19)R.

Citations and references

Statutes:

• Tax Law § 255.1(a) (supplemental mortgage treatment -- no new tax if secured debt isn't increased)

Prior opinions cited:

• 1909 Op. Atty. Gen. 530 (compounded deferred interest is taxed as new principal at maturity)
• John P. Napoli, TSB-A-91(5)-R (May 28, 1991) (accrued interest that itself bears additional interest loses its character as interest and becomes principal)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/mortgage_rec_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/mortgage/a93_12r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (12) R
Mortgage
Recording Taxes
June 25, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M930401A

On April 1, 1993, a Petition for Advisory Opinion was received from Ticor Title Guarantee
Company, 1211 Avenue of the Americas, New York, New York 10036-8701.
The issue raised by Petitioner, Ticor Title Guarantee Company, is whether additional
mortgage recording taxes are due upon the recording of a modification agreement which modifies
an existing mortgage to provide that accrued interest on the original mortgage indebtedness which
is owing will be paid in a fixed amount at maturity of the mortgage, and that such accrued interest
will not be added to principal and will not bear interest.
A mortgage is being modified to provide that the accrued interest which is owing will be
deferred and paid in a fixed sum at maturity. The accrued interest will not be added to principal and
will not bear interest.
Section 255.1(a) of the Tax Law provides, in part, as follows:
If subsequent to the recording of a mortgage on which all taxes, if any, accrued under
this article have been paid, a supplemental instrument or mortgage is recorded for the
purpose of correcting or perfecting any recorded mortgage, or pursuant to some
provision of covenant therein, or an additional mortgage is recorded imposing the
lien thereof upon property not originally covered by or not described in such recorded
primary mortgage for the purpose of securing the principal indebtedness which is or
under any contingency may be secured by such recorded primary mortgage, such
additional instrument or mortgage shall not be subject to taxation under this article,
except as otherwise provided in paragraph (b) of this subdivision, unless it creates or
secures a new or further indebtedness or obligation other than the principal
indebtedness or obligation secured by or which under any continency may be secured
by the recorded or primary mortgage, in which case, a tax is imposed as or provided
by section two hundred and fifty-three of this chapter on such new or further
indebtedness or obligation. (emphasis added)
A 1909 Opinion of the Attorney General opined that where a mortgage is given for a loan
with a provision that no interest is payable until maturity, but the amount to be paid at maturity
equals the amount loaned with interest compounded, the mortgage tax should be computed on the
total sum due at maturity. In this case, instead of paying over to the mortgagee the interest when it
became due, the mortgagor retained it, and proceeded to add it to the amount which he owed the
mortgagee and the amount upon which future interest was computed. The substance of the
transaction was as if the interest had been actually paid to the mortgagee and the mortgagee then
loaned the same amount back to the mortgagor. Thus, the principal obligation of the mortgage was
the amount upon which the interest was computed upon after maturity. 1909, Op. Atty. Gen. 530.

-2­
TSB-A-93 (12) R
Mortgage
Recording Taxes
June 25, 1993
In John P. Napoli, Adv Op Comm T & F, May 28, 1991, TSB-A-91(5)-R, the Commissioner
opined that accrued interest loses its character as interest when additional interest is allowed to
accrue on the unpaid interest, and thus, becomes part of the principal indebtedness or obligation
secured by the mortgage.
The instant case may be distinguished from the Opinion of the Attorney General, supra, and
John P. Napoli, supra, in that the modified mortgage agreement provides that the accrued interest
being deferred will be paid in a fixed sum at maturity, will not bear interest, and will not be added
to the principal amount of the mortgage. Therefore, the modified mortgage agreement does not
create or secure a new or further indebtedness or obligation other than the principal indebtedness or
obligation secured by the recorded primary mortgage, but merely extends the due date for when the
accrued interest is payable. Accordingly, pursuant to Section 255.1(a) of the Tax Law such mortgage
modification agreement is a supplemental instrument or mortgage and the recording of such
agreement will not be subject to additional mortgage recording taxes.

DATED: June 25, 1993

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.