Changes in STAR Exemption Impact Mortgage Escrow Accounts
Given its size and complexity, it’s not surprising that just about every year there is a provision or two in New York State’s budget that has unintended consequences. Unfortunately for those of you with escrow accounts, this year there is a glitch that affects you (See A.9009-c, Part A).
Under New York’s STAR program, property owners are exempt from paying a portion of their school property tax on their primary residence (see generally Section 425 of the Real Property Tax Law). The way the program has traditionally worked, the school property tax bill that the homeowner receives, usually in early September, reflects the amount of taxes they owe after the exemption is calculated, i.e. already taken out. This means that escrow accounts reflect the amount the member owes.
Here’s where things get complicated. At the urging of Governor Cuomo, this year’s budget begins a transition converting the STAR tax exemption into a STAR tax credit. Under the new approach, taxpayers will be billed on the full amount of their school tax assessment and then receive a tax credit reflecting the amount of their STAR exemption. In other words, they will bear the upfront costs of the assessment and get reimbursed when they file their taxes.
These changes are generally meant to apply to new homeowners, but because of the way the language was drafted if you weren’t in your new home on tax levy day of the 2015-2016 school year, they apply to you.
As an astute reader of my blog recently pointed out, this change creates a whole bunch of issues for mortgage escrows. For instance, since the amount in escrow has to reflect the amount of taxes due, members will have to put more money into their escrow account than they will need. Furthermore, holders of escrow accounts will presumably have to return this extra money to members.
This is one we will be keeping an eye on. Stay tuned.