For many co-ops, flip tax is a critical source of income. These fees are collected from sellers when they sell their apartments and help the building subsidize its maintenance costs. While it’s easy to see why people who aren’t planning on selling their apartment anytime soon might wish they could eliminate flip taxes, these fees are essential for the long-term financial health of buildings.
In addition to helping to subsidize the cost of building maintenance, flip taxes discourage apartment flippers, which can slow the turnover of apartments in the building and prevent the need for expensive repairs that might otherwise have to be paid out of the operating budget. Moreover, these fees can be an important incentive for owners to make the necessary improvements that will keep their apartments in good condition and attract renters.
A flip tax can be based on a percentage of the sale price or a flat fee per transfer. A percentage of the sale price is often more controversial, as it can provide an incentive for buyers to pad their expenses in order to reduce the net profit figure that will be used to calculate the flip tax. It’s essential that a co-op carefully define its formula for calculating net profit and rigorously enforce it.
Alternatively, a flip tax may be based on a flat fee per transaction, such as $5,000 per transfer. This approach can be a better compromise for a cooperative that doesn’t want to lose the ability to adjust its fee based on the size of the apartment sold. This method of enacting a flip tax is also fully legal, provided that it’s carefully drafted to comply with amended Section 501(c) of the Business Corporation Law.
Whatever the method of implementing a flip tax, it’s crucial that the board present a united front and clearly explain how this will benefit the entire community of shareholders. This includes the current shareholders who plan to stay in their apartments a long time, as they will ultimately see that the turnover of apartments is helping to fund a variety of projects that would otherwise have been funded out of their pockets through maintenance increases and assessments.
A well-executed flip tax can also serve as a deterrent for property speculators, who might otherwise seek opportunities elsewhere in New York State. Indeed, the state’s reputation for attracting investors and high earners is an important reason why New York’s real estate market is so desirable.
The bottom line is that a flip tax will only succeed if it’s a reasonable amount and fairly applied. If a building’s residents are paying for upgrades to their apartment through flip taxes, they deserve to be treated fairly and not have their investment undermined by an unfair tax regime. To that end, it’s important to keep in mind that a co-op or condominium can amend its proprietary lease and by-laws to add a flip tax, but such a change requires a majority vote of the shareholders.
A few months ago, two attorneys representing sellers who were closing on their co-op apartments in Brooklyn were told by their clients that the corporation was imposing three percent of the sales prices in “flip taxes,” technically known as transfer fees. These are levied at the time a shareholder sells his apartment to help the co-op build up its reserve funds.
It is a controversial issue – some believe the fees discourage buyers and sellers from selling their homes. Others, however, argue that a proper-tailed flip tax helps keep building reserves stable and reduces maintenance charges, as well as the need for large special assessments. A recent decision by the New York Court of Appeals may make it harder for cooperative corporations to impose flip taxes, however.
The Court ruled that in order for a flip tax to be valid it must either be written into the co-op’s organizing documents or included as an amendment in its proprietary lease. In both cases, it must be voted on and approved by at least two-thirds of the shareholders.
Aside from the legal concerns, many lawyers say that even if a flip tax is valid, it can be difficult to enforce. A faulty formula or method of calculation can lead to refund requests from prior residents who believe the fee is unfair and can prompt collusion between sellers and buyers to beat the system.
One form of a flip tax, called a cost-based system, bases the transfer fee on the profit realized by the seller and adds in such expenses as broker fees, legal costs, the value of any capital improvements that he or she made to the property, and closing costs. While this approach is usually less contentious than a percentage of the sales price or flat fee, it can be tricky to calculate and can result in wildly different transfer fees for identical apartments, which can run afoul of 80/20 rules that require Fannie Mae and other lenders to treat similar properties as equivalent for mortgage financing purposes.
Another common method is a percentage of the gross sale price, which is usually easier to calculate and has few legal concerns. This approach, however, can be unfair to a seller who loses money on his or her sale and can prompt collusion between a seller and buyer to beat the system by hiding additional profits from the cooperative.
A third way of calculating a flip tax is to base the fee on a portion of the profit multiplied by the number of shares owned. While this method is generally accepted by courts and other legal authorities, it can be confusing for shareholders, especially when the calculation includes different share amounts for a single unit. And because the proportions can change in a matter of years, this type of transfer fee often results in dramatic differences in transfer taxes for similarly-priced apartments that were sold in different market cycles.
A flip tax is a fee applied by co-ops and condominiums to real estate transactions to generate money for the building. It's most commonly seen in HDFC coops, where flipping is discouraged, but it can also be found in traditional co-ops as well. Flip taxes can be very helpful to co-ops because they can help ensure the co-op's finances and prevent excessive speculation by investors or house flippers.
The flip tax, which is not to be confused with a transfer tax, is a fee that is paid by the seller and usually consists of a percentage of the sales price. In some cases, it is a flat fee. Regardless, it is an additional closing cost that needs to be negotiated and factored into the purchase or sale price.
There are different ways to calculate a flip tax, and a board can decide which one is best for their building. Some buildings may use a formula such as a percentage of the sales price, while others may base it on the number of times the unit has changed hands or on the previous owner's mortgage balance. Another option is for a board to impose a flat fee.
Who Pays A Flip Tax in NYC
If a flip tax is part of the selling price, the seller will be responsible for paying it at closing. However, if the flip tax is stipulated in the building's by-laws or contract of sale, it may be the buyer's responsibility. In either case, the buyer should make sure to include it as a closing cost when making their offer.
Some boards also charge a flip tax for non-cash sales, which can be more problematic. This requires the board to come up with a way of pegging the value of an apartment when there's no market-based transaction involved and to figure out who is responsible for hiring an appraiser, which can be expensive.
A flip tax can be an excellent source of income for a co-op, but it's important to remember that it will only work if enough buyers and sellers agree to it. The problem is that a lot of people don't want to pay a flip tax, which can lead to negotiation headaches. Even if the board wants to get rid of it, it will be a challenge because it would require a majority vote from shareholders and may be met with a lot of opposition.
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