WHAT ARE FLIP TAXES AND WHY DO THEY MATTER?
What should buyers and sellers know about flip taxes in New York City co-op sales?
Purchasing a resale co-op apartment comes with a host of pros and cons, especially when it comes to costs. On one hand, a resale co-op can often be a better value than new development. On the other, a resale can, in many situations, come with complex fees and rules, all dependent on the building the apartment is housed within.
One common source of confusion in co-op resales is what is colloquially known as the “flip tax.” In reality, the flip “tax” is really more of a flip “fee.” It’s a not a government-imposed tax (and is not the same as New York City and New York State’s respective transfer taxes).
A flip tax is a charge—usually paid by the seller—levied by a co-op board whenever shares of the co-op (in the form of apartments) are sold or transferred to a new resident or non-heir.
The flip tax can vary in form, amount, usage and execution, depending on the needs and decisions of the co-op’s board and shareholders. It can be anything from a percentage of the sale profits to a flat fee, but it is usually seen in New York City co-ops as either a small percentage of the gross profit or a small percentage of the contract amount.
Many buyers and sellers view the flip tax as an archaic annoyance. However, to understand the pros and cons of the flip tax, it’s important to understand how it came about in the first place.
Flip taxes were originally created and enacted by buildings in the 1970s and 1980s, when a plethora of New York City apartments were privatized and converted into co-ops. Shares in these buildings were offered at artificially low prices to existing residents to encourage investment in the property, and the flip tax emerged as a way to prevent these new shareholders from flipping their purchases—selling their discounted shares at the much higher market value, making a profit for themselves but leaving the buildings (many of which needed significant repairs)
The flip tax is still useful today, primarily because it helps pad reserve funding for co-op boards. Ideally, co-op boards won’t work projected flip taxes into their budget in a way that will make essential, recurring costs dependent on these fees, but flip taxes can sometimes act as windfall money and be used help ease the burden of extra costs like unplanned emergency upkeep and future improvements on shareholders. This extra income can be used to pad reserves, improve the building and generally serve the shareholders.