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You’ve probably heard the term “flip tax” mentioned in conversations that involve buying and selling New York City real estate. This tax, which is a transfer fee and not deductible as a property tax, is one that is typically paid by the seller and sometimes the buyer of a NYC co-op or condo.
Flip taxes are rare in other places but have been assessed in New Jersey, although they’re referred to differently. These dreaded fees are a way for your co-op or condo to say, “Thanks for staying with us. We hope you enjoyed your time here, now pay up before you leave.”
Below are some of the most asked questions about flip taxes.
How long have flip taxes been around?
These creatures got their start in the 1970s and 1980s when rental apartment buildings started converting to co-ops. Many structures were in disrepair and cost thousands to renovate. After which, tenants could sell their units turning a large profit, but the building was stuck with the debt from rehab. 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.
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 lease, two-thirds of the shareholders must approve the imposition of the flip tax.
How much is the tax?
The percentage of 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 amount of shares set aside for the apartment; a percentage of the sales price or net profit of the sale; as well as a percentage based on the length of time the seller has owned the apartment.
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, often the flip taxes from past sales can pay for the project in full, or at least a good part of it. In turn, the maintenance fees won’t need to be increased, and assessments wouldn’t be necessary either.
Is there any way I can get out of paying it when I sell my apartment?
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 purchase 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.