Paying Co-op Flip Taxes in New York

You’ve probably heard the term “flip tax” mentioned in conversations that involve buying and selling New York City real estate. Flip taxes cannot be deducted as a property tax, typically paid by the seller and sometimes the New York City co-op buyer.

Anyone who’s ever bought or sold a co-op will be familiar with something called a flip tax. It is a co-op’s way of saying, “So you’re leaving, huh? Well, pay us some money, and we’ll let you go.” Flip taxes, sometimes known as transfer fees, are an option for a co-op to increase its financial resources without resorting to unpopular maintenance assessments.

If you’re new to the co-op market, the term might cause some confusion. Read on for the definitions and tips to arm yourself with the right knowledge for buying your dream New York City apartment. Below are some of the most asked questions and all you need to know about flip taxes.

New York City Co-op Flip Taxes Explained

The New York City Flip Tax is a fee that is paid, in addition to the purchase price of a co-op apartment following a sale. Either buyers or sellers can pay it – more on that in a moment – and can be either a flat rate or percentage of the sale price or profit made. The amount varies by building and can be hard to pin down. Because of NYC’s average 6% real estate commission, closing costs for sellers are sky-high. Often more than 8% of the sales price. While you won’t be able to eliminate the Flip Tax, you have a chance of being able to negotiate the 6% commission when selling.

How Long Have Flip Taxes Been Around?

Flip taxes first came about in the ’70s and ’80s. At the time, there was a wave of co-op conversions throughout the city. Many of these buildings were in poor condition and badly in need of capital investment. After this, tenants could sell their units, turning a substantial profit, but the building was stuck with rehab debt. The flip tax was created as a way for the co-op to recoup the improvement costs, so the building had reserves to fund its ongoing operating expenses.

The flip tax helps the co-op to build up their cash reserves and strengthen the building’s financials. It also prevents people from buying apartments at a cheap rate, then turning around and selling them for much more without putting anything into the residence’s value.

Who Pays The Tax?

More often, the seller pays the flip tax. The idea was that a flip tax to the seller would help keep the buyer’s purchase price down while maintaining a small percentage of the seller’s profits for the co-op or condo. However, in 2010 the sluggish housing market changed that. More common for sellers to pass on the tax to buyers instead.

The reason for the shift was that sellers began including the flip tax on the sales price. The higher sales price meant; less offers. By lowering the sales price and having the sellers pay the flip tax fee, the sellers could get a little more interest in the property.

If you’re currently looking to buy a co-op, you should ask early whether the property requires a flip tax to be paid by the buyer. In any case, the co-op doesn’t care who pays it; they want to see it go into their reserves.

What’s The Point of Imposing A Flip Tax?

As mentioned above, the profit goes directly to a co-op’s operating expenses. The point is to avoid assessments and maintenance increases for the shareholders. With thousands of dollars in reserve funds, if the building requires a capital improvement project, the flip taxes from past sales can often pay for the project in full or at least a good part of it. In turn, the maintenance fees won’t need an increase, and assessments wouldn’t be necessary either.

How Much Is A Typical Tax?

Flip taxes come in many shapes and forms. Typically, the percentage of the flip tax depends on the building. Most often, a flip tax is 1-3 percent of the sales price. (At 3 percent, a $1,000,000 apartment’s transfer fee would be $30,000.) But a flip tax can also be calculated based on the number of shares set aside for the apartment, a percentage of the sales price or net profit of the sale, and a percentage based on the length of time the seller has owned the apartment.

However, each building has its policy, and there is no way to generalize. Usually, it comes in the following ways:

• Percentage of the gross sale price
• Set dollar amount per co-op share
• Percentage of sales profit
• Hybrid of any of the above

Co-ops, Condos, or Both?

When dealing with a co-op, it’s practically a guarantee that there will be a flip tax. With condos, it’s a little bit different. Instead, condos can be subject to transfer taxes, which is something entirely different. For a flip tax to pass, most bylaws/proprietary leases require a 2/3 majority vote from the shareholders. Any absent vote is a no vote. Investors own many condos from out of town, thus makes getting a 2/3 majority difficult. 

Is There Anyway I Can Get Out of Paying The Flip Tax When Selling?

Unfortunately, no. You’ll have no choice but to ante up for this transfer fee when you go to sell your co-op. There is the possibility that you could purchase an apartment in a building with no flip tax. There’s also the possibility that you could buy in a building where the buyer pays the fee. In which case, you’d be responsible for forking over the flip tax when you buy into the building instead of when you sell your apartment.

Are Flip Taxes Legal?

A flip tax must be written into a co-op’s proprietary lease to be legal. If not verbalized in a sub-lease, two-thirds of the shareholders must approve the flip tax’s imposition.

Are Flip Taxes Tax Deductible?

Usually, you can subtract the flip tax when calculating your taxable capital gains. However, you should still consult your attorney and tax professional for advice.