Many co-ops have a “flip tax,” which is a fee charged to a buyer upon the sale of their shares. Often it is a percentage of the sales price. Generally, the co-op charges this to help pay for the building’s maintenance fees. A few condominiums in the state also institute this fee. But the majority of condo buildings don’t have a flip tax. And those that do have them don’t use them as often as their counterparts in co-ops.
Co-ops generally have a very clear set of rules about how to administer their flip taxes. They are usually outlined in the bylaws, resale application, or proprietary lease. They can also be imposed by board action. The exact amount varies from co-op to co-op. Some charge a flat fee, while others require the cost basis of the seller’s shares and/or the sale price of the apartment.
In general, the fees are a fair way to raise money for the maintenance and upkeep of a building without raising the maintenance fees or forcing the sellers to pay capital gains taxes. And, if done well, they can even increase the value of the units.
However, a flip tax is a controversial issue. It can be a burden on the seller and a deterrent to some buyers. It can also have a negative impact on resale values in the building.
It’s important for building owners to consider this when deciding how to structure their flip tax and to keep in mind that almost everything in a NYC real estate deal is negotiable. It’s possible to negotiate a waiver of the flip tax in a transaction, but it has to be reasonable given the demand for your building. A good tactic is to offer a waiver of the flip tax in transactions where you’re transferring ownership to a spouse, permanent companion, child, or parent.
Regardless of the reasons for a flip tax, it’s important to keep in mind that a building’s governing documents must support the transfer fee and have the required legal authority in place to enforce it. Prisand notes that a flip tax cannot be introduced as a new item in the governing documents; it must be included in the original offering plan or as an amendment to the proprietary lease. In either case, the law requires that it be voted in by two-thirds or more of the shareholders, at a meeting called for that purpose.
A smart board will also keep shareholders updated about how the flip tax is working. They can do this by including the information in their accountant’s reports and by making announcements at meetings. Keeping everyone aware of how the flip tax is helping the building will be important in promoting its acceptance. It’s a lot easier to sell a building with an effective flip tax in place than one without one.
A new law introduced in the state legislature and signed by Governor Cuomo last month would impose a 1% fee on all sales of real property within two years of purchase to discourage speculation in residential buildings. The bill is being pushed by the co-op industry in response to new legislation limiting foreign investors and the proliferation of “flips.” The law also would make it easier for co-ops to pass on to shareholders the fees collected from buyers.
In addition, a condominium needs to amend its bylaws and proprietary lease in order to add the flip fee. To do so, it must be voted on by the condominium’s entire membership and require a two-thirds majority. Consequently, many condos do not have flip taxes.
The most common form of flip tax today is a percentage of the gross sale price paid by the seller of an apartment in a co-op building. This fee, which is not a “tax” and is not deductible for federal income taxes, can help co-ops to help fund their overhead expenses without raising maintenance fees or assessments for all shareholders.
Other formulations of a flip fee include a flat fee per transaction (e.g., $5,000 per transfer), which can benefit owners of larger apartments who don’t pay the same amount as a buyer of a studio. This method can be the best compromise for a cooperative that does not wish to implement a percentage of the gross selling price or a straight per-share assessment.
A co-op board that decides to implement a flip tax should consider its best allies to be the long-term owners of the building. The shareholders who will most likely be around for a long time should be encouraged to see that the money collected from the flip fee will go into their reserves and thus not come out of their pockets in the form of maintenance increases or assessments.
Ultimately, the best way to determine which formula will work for your building is to consult with your counsel and conduct a thorough survey of all shareholders. Once the decision is made, the board can then proceed with the necessary amendments to the by-laws and proprietary lease, which will usually require a two-thirds majority of the votes at a special meeting held for that purpose. The attorney should also review the appropriate sections of the modified Business Corporation Law to ensure that any flip fee is enforceable.
Many new co-op and condo buyers are surprised to find out that their sale will include a flip tax in addition to transfer taxes and brokerage fees. Flip taxes are a fee charged to the purchaser by the building to help cover capital improvements in the property. It is typically a percentage of the sale price, usually between 1% and 3% of the purchase price. The amount is decided by the board of directors and it is outlined in the proprietary lease, by-laws or resale application.
The purpose of the flip tax is to generate revenue for the corporation which can be used for maintenance, repair or capital improvements. It is also a way to discourage people from quickly reselling their shares and thus, generating large profits for themselves. In general, a flip tax is a good idea because it prevents the building from having to raise maintenance fees or assessments.
Co-ops generally have a lot of flexibility as to how they set their flip taxes, but the most important thing is that the flip tax be consistent and well-publicized. The board should be sure to have the accountant write a note in each year’s financial statement explaining the flip tax and how it is being used. In addition, it is wise to report to shareholders periodically on how the flip tax has been beneficial to the building.
Some buildings charge a flat fee for every transfer, while others impose a percentage of the sale price. The most common is a 2% flip tax, which is shared between seller and buyer. It is a cost of selling an apartment that is not deductible for income tax purposes as it is considered part of the sales proceeds, but it can be deducted for capital gains.
A privately owned building that has a flip tax in place must be careful to make sure it does not discriminate against its owners or discourage them from selling their apartments. Otherwise, it can get into a lot of trouble with the state. In addition, if a flip tax is too high, it can drive real estate investors to surrounding states and reduce government revenue overall.
While flip taxes are a nuisance for sellers, they are not as much of an issue for buyers. They are generally deductible as part of the sale proceeds for income tax purposes, and therefore will lower the buyer’s overall tax liability.
It is possible for a building to waive the flip tax when an owner transfers his or her share to a spouse, permanent companion, children, or immediate family members. It is a good idea to review the building’s by-laws or resale applications to see what the rules are and be aware of any exceptions. Most buildings in NYC do not have a flip tax, but those that do should be prepared for the fact that it will be an additional cost of buying or selling a home.
Sishodia PLLC | Real Estate Attorney and Estate Planning Lawyer | Asset Protection Law Firm | 1031 Exchange - NYC
600 Third Avenue 2nd Floor, New York, NY 10016, United States
(833) 616-4646