What is a Flip Tax in NYC?
A flip tax is not a tax from the government, but rather a transfer fee charged by co-ops (sometimes condos, more below) when a sale of an apartment occurs. Most often, the flip tax is paid by the seller. Sometimes it is funded by the buyer (more likely in high-end co-op buildings), and sometimes it is negotiated by both parties and shared between them. The sale of the contract will always specify who is responsible for this expense.
How did it start:
Flip taxes first came about in the late seventies and eighties when rental buildings throughout the city were converting into co-ops. The tenants were buying their units at low prices and then reselling them at a higher price making huge profits- called “flipping.” Which lead the co-op boards to impose the transfer fee, calling it a “flip tax” on sellers to discourage them from flipping. In addition to this, many of the buildings going through the conversions were in poor condition and in dire need of significant capital investment. The flip tax helped generate funds to make improvements and build up cash reserves for the future. Fast forward to today, co-op boards and management companies lobby flip tax to shareholders arguing that having a flip tax in place generates revenue for the building’s expenses without raising the maintenance or having special assessments. A flip tax is legal- if it is documented in the co-op’s proprietary lease and by-laws. If it’s not, two/thirds of the shareholders must vote in favor of imposing a flip tax.
How are flip taxes structured?
There are several ways co-op boards calculate flip taxes. One way is by charging a percentage of the gross sale price- usually 2-5% and sometimes even over 10%. Here are some additional ways that flip taxes can be structured:
- Set dollar amount per co-op share owned
- A flat-fee flip tax
- Percentage of sale profits
- Combination of any of the above flip tax formats
Are there flip taxes in condos?
You’re more likely to deal with a flip tax in co-ops than with condos. Condos can be subject to transfer taxes. As mentioned above, a flip tax can be passed when two/third of the shareholders vote in favor of it. An absent vote is a no vote. With many condos having investor owners outside of New York City or overseas, it’s difficult to have a 2/3 majority. And in some circumstances when dealing with condos or new developments, you may be asked to make an initial contribution to the building’s reserve fund.
The amount might be a fixed amount or the equivalent of several months of common charges.
Are flip taxes taxable?
As a seller, you can usually reduce your taxable capital gains by subtracting the flip tax as an additional cost of the sale. However, you should seek professional advice from your attorney and CPA regarding this matter.
Now that you have a better idea of what a flip tax is, you should keep in mind that every co-op and condo buildings has their own set of rules and policies. While looking at properties, be sure to ask your buyer’s agent to find out all the details so that you can make the best choices.
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