Understanding NY Flip Tax is a fee charged by a co-op to its shareholders on the sale of their apartment. It’s a common practice in many NYC co-ops and condos. The flip tax is in addition to the seller’s closing costs which include broker commissions and the NYC & NYS transfer taxes.
The reason for the fee is to help the co-op generate funds for its overhead expenses without raising maintenance fees for the entire building, and to discourage people from buying and quickly reselling their apartments at a profit, thus depleting the building’s reserve fund. The co-op can also waive the fee for family transfers.
Flip taxes are more common in co-ops than in condos because co-ops tend to have stricter policies aimed at attracting buyers who will use their residences as long term homes. In addition, flip taxes may be more politically feasible than increasing maintenance charges for the entire building or imposing a flat transfer fee on all shareholders.
A co-op can establish a flip tax in its original offering plan or by an amendment to its proprietary lease with the approval of two thirds of all shareholders. However, the fee must not be a percentage of the sales price or of the shares sold. It can be a flat fee per share, based on how long the buyer has been in the building, or a sliding scale depending on how long the purchaser intends to remain in the building.
The best formula for a flip tax, according to Mr. Weinstein, is a percentage of the net profit of the sale (which must be clearly defined and strictly adhered to by the board). The other leading methods—a fixed dollar amount or a flat fee—have disadvantages. The fixed dollar amount could erode over time, and the flat fee can lead to collusion between sellers to “beat the system” by padding costs in order to lower their sales prices and their share of the flip tax.
If a building does implement a flip tax, it is important to keep shareholders informed on how the money is being used to improve the property. This can be done by adding an item to the accountant’s notes in the annual financial statement, and/or by periodically producing a chart comparing the amount of money actually coming in from the flip tax to the actual cost of capital improvements.
Finally, if your building has a flip tax, a good real estate agent will always be sure to ask whether the seller is paying it. This will help determine the sales price for the apartment and the amount of the total seller closing costs. This way, a prospective buyer can make an educated decision about how much to offer for the property.
A co-op or condo building’s flip tax is a common source of revenue for buildings. It generates income, discourages apartment flippers and can lower turnover times, and also helps keep assessment costs down for owners. It’s a great option for a building, but it is important to understand how it works and what its pros and cons are before you buy or sell.
Originally, flip taxes were introduced as a way to increase revenues in co-ops during the wave of conversions in the 1980’s. These converted co-ops often needed major capital improvements. The original owners bought their shares at insider prices and then sold them at market rates, making a profit but leaving the building short of its needs. The flip tax was designed to prevent this by requiring those who sell their units to contribute some of their profits back to the building.
But the flip tax has become something more than a practical tool to increase co-op revenue. It has now largely come to be accepted as a standard part of the NY real estate experience and it’s baked into most buyers’ price calculations. It’s also a source of contention between those who are looking to sell their apartment quickly and others who would like to see it eliminated.
How a building’s flip tax is structured makes a big difference. Some buildings charge a percentage of the sale price while others use a flat fee per transaction or even a flat amount based on the size of the apartment. These different methods are all perfectly legal as long as they are listed in the building’s proprietary lease or by-laws, which usually requires 2/3 shareholder approval.
The most controversial method of flip tax calculation is the percentage of sales price, which can lead to collusion between sellers and buyers trying to beat the system. A flat fee, on the other hand, can be beneficial to larger apartment buildings and is a good compromise for those who do not want to pay a percentage of sales price.
Regardless of which flip tax formula is used, the money collected should be placed in the building’s reserve fund so it can be used to make future capital expenditures. The money cannot be used for operating expenses or assessments.
If a building decides to change the way it handles its flip tax, it can do so by amending the proprietary lease or by-laws. But before a change is made, it’s important to consider how it will affect current shareholders. The best allies of a flip tax will be those who plan on staying in the building for a long time and can see how their maintenance increases, assessments or debt service payments will be lowered by the proceeds of the flip tax. These investors should be the largest group in support of any flip tax amendment. Those looking to buy in the short term, on the other hand, will likely oppose it.
As many co-ops face declining sales and rising maintenance costs, some are turning to “flip taxes” – fees that penalize new buyers who sell their apartments shortly after buying them – as a way to bolster the building’s reserves. But while many experts believe that this strategy is a viable one, the concept is not without its critics. In fact, some shareholders are so unhappy with the idea that they are willing to vote against a flip tax – even though the funds it generates could help them avoid paying higher maintenance or assessments in the future.
The origin of flip taxes lies in the 1970s, when many occupied rental buildings were converted to cooperatives and needed major capital investment to remain in good condition. Attorneys representing residents in those conversions came up with the idea of a flip tax as a means to raise money to pay for those investments.
Initially, the flip tax was based on a percentage of the seller’s net profit. But that proved too difficult to enforce, so some buildings started charging a flat fee per apartment sold. But a flat fee can be unfair to those who lose money on their sale, and it can also encourage collusion between sellers and buyers to beat the system.
Another problem is that a flat fee may be a regressive form of flip tax. If you have a two-bedroom and it’s selling for $500,000, but someone sells a three-bedroom for the same price, they should pay the same flip tax. Moreover, flat fees can be subject to inflationary pressures that can make them obsolete over time, he adds.
A more acceptable form of flip tax is a formula based on the gross sales price of the unit, which can be easier to enforce, Weinstein says. But a building must carefully define exactly what that formula will be, and it must be strictly and consistently applied. For instance, a building that allows for a deduction from the sales price for improvements made to an apartment must ensure that the cost of those improvements is documented and verified by evidence such as receipts and invoices.
Assuming that a co-op can successfully implement a flip tax, it’s important for the board to communicate with shareholders to convince them to support the policy. A letter should be sent to all shareholders prior to the vote explaining the reasons for the change, and any specific capital projects the building is aiming to fund with the new revenue. In addition, a grace period should be built into the amendment so that any shareholders who currently have their apartments in contract can sell them before the flip tax goes into effect. This will help to ensure that the vote has a high turnout. Cooperatives in NY can only impose a flip tax by amending their proprietary lease and by-laws, which requires the approval of a majority of the shareholders.
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