NYC Real Estate- Understanding Flip Taxes
Transfer Fees Imposed in Co-op and Condo Sales
Sep 14, 2009
Many of the current cooperative apartment buildings in New York City started out as rental buildings. Beginning in the late 1960's and peaking in the 1980's, landlords started to convert their buildings to cooperatives in order to raise cash. Current rental tenants were given right of first refusal to purchase their units at deeply discounted "insider" pricing.
Many tenants took advantage of the favorable pricing then quickly re-sold the units at market rates. The flip tax was designed as a fee to generate revenue for the building and was imposed on the sellers who were making the big profits. While the number of cooperative conversions has dropped, many long established co-ops still impose these fees on the sale of apartments. Some condominium buildings also charge this type of fee.
Who Pays the Tax
The flip tax was originally intended is a fee on sellers and many building by-laws still require the seller to pay the tax. However, depending on the state of the real estate market at the time of the sale, many sellers may try to pass the flip tax on to the buyer. For example in a seller’s market, where there are multiple bids on particular unit, a seller can ask the buyer to pay the fee. In a buyers market this may be more difficult for the seller to negotiate. The tax must be paid at the time of transfer of ownership.
Computing the Cost
The amount of the flip tax or transfer fee varies widely from building to building. The formula for computing the fee is usually found in the building’s by-laws. The most common computation methods are:
- Flat fee imposed on each apartment sale. A variation on this is a flat fee based on the size of the unit. For example a one-bedroom unit could be charged $1,000, two-bedroom unit $2,000, etc.
- Fee based on the number of shares. A common type of flip tax charged when co-ops were initially converted was $1.00 per share. This is only found in cooperative buildings where shares are allocated to unit owners. Condominiums do not allocate shares.
- Fee based on percentage of the sale price. This type of fee structure is starting to become more common as buildings move away from the share-based calculations.
Some buildings, trying to impose lesser penalties on long-term residents, are coming up with more complex transfer fee structures based on the length of time that the owner has held the apartment.
Advantage of Transfer Fees
While no one likes to pay taxes, current residents do benefit from the flip taxes paid by their neighbors who move out. Co-op and condo revenue streams are typically limited to monthly maintenance from shareholders and rental from commercial units. The flip tax is an additional source of revenue. Most building boards will deposit the transfer fees into the reserve fund. The reserve fund is used for capital improvements and building repairs.
Purchasers should consider the flip tax when buying into a building even if the seller has agreed to pay it. If a purchaser only plans to stay in the building a short time before trying to sell the apartment again, the transfer fee may come out of his profit unless he is able to pass it on to the next purchaser.
 |
