What is the flip tax in New York real estate?

April 3, 2020 by Georges Benoliel

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Through this guide, NestApple will help you navigate through the technicalities of the flip tax in New York real estate, which is NOT even a tax as 100% of it goes to the building, not the government.. We’ll explore common questions about Coop. flip tax NYC, including how they work, who pays them, and what types of properties they apply to. New Yorkers came up with this concept to increase revenues in buildings.

By imposing a flip tax in NYC, sellers are reluctant to flip apartments and therefore reducing the turnaround in buildings. Additionally, buildings that have flip taxes generally have fewer assessments and perhaps may have lower debt levels as a result of this additional funding source.  

What is a flip tax in New York real estate?

First of all, the name “Flip Tax” is a little deceiving. This expense is not a tax at all. For example, it is different from your typical transfer taxes. Instead, it’s a payment made for transferring property between a seller and a buyer.

It’s not part of property taxes. It is only a fee implemented by a building.

The percentage is calculated based on the sale price. The flip tax is payable in addition to all other seller closing costs, such as broker commissions and the NYC & NYS Transfer Taxes paid.

When and why did the flip tax in New York real estate come about?

Flip taxes came about as a solution for the 1970s housing crisis in NYC. During this time, there was a wave of co-op conversions throughout the city as buildings became privatized. Those buildings were often run-down and in dire need of significant capital investment. In the 1970s and 80s, when a bunch of crappy rental buildings was converted to co-ops, they had to make lots of improvements.

Improvements cost money, and many buildings were left with very little. The tenants (rent-controlled for the most part) could sell their apartments at a huge profit. As a result, they now had funds to contribute and build up the reserves for the future if they left.

It’s legally sound for co-ops to charge these fees, but only if they’ve already written out the charges and had them approved in the building’s proprietary lease.

First, the tax still discourages flipping. While most original co-op owners have sold by this point, you can still flip an apartment. Regardless of the owner, the tax discourages short term ownership periods. These taxes remains just one of the many reasons short-term apartment ownership in NYC doesn’t make sense. 

How much is the flip tax in New York buildings in a typical coop?

Over 80% were calculated as a percentage of the gross sale price. Other ways included:

• A percent of the owner’s capital gain
• A fixed dollar amount per share
• An amount that declines the longer you hold the apartment

The average flip tax in NYC represents 1% to 3% of the purchase price. The amount varies by building, and in rare instances, you may also encounter a condo which charges a flip tax in New York City. The amount is not set in stone; each building has its regulations and specifications. The typical range remains between 1 and 3%, but 2% seems to be the magic number.

We also found the vast majority of Coops – about 90% – have some kind of flip tax. For example, say you buy an apartment for $1,000,000 in a building with a 2% flip tax. You hold it for five years and sell it for $1,200,000 so you owe $24,000. $24,000 is a lot of money but compared to a gain of $200,000, you might not get too worked up. But don’t forget you paid $10,000 for the mansion tax when you bought, $22,000 for the transfer tax during the sale and possibly a mortgage recording tax as well.

Are they only for co-op buildings, or do condos have them as well?

In general, we only find flip taxes paid in transactions involving properties in an NYC co-op.

Most condo sales do not have this additional fee, and therefore, buyers/sellers don’t pay that amount. Everyone agrees that co-op boards have the authority to implement it. However, some NYC real estate lawyers have argued that condos can also impose flip taxes, although they remain quite rare. 

Who pays the flip tax, and is it tax-deductible?

Flip tax remains a typical “New York Real Estate concept,” and typically paid by the seller. However, asking the buyer to pay it sometimes happens in the context of a home property or bidding war. Some sellers force buyers to pay it, and others agree to split it.

Regardless of who’s covering the costs, it remains an important concept to keep in mind. Always include this cost in your calculations when thinking of your next purchase.

The flip tax is tax-deductible, and you can reduce your taxable capital gains as a seller or as a buyer by subtracting it as an additional closing cost.

Can buildings change their flip tax?

Yes. A co-op or condo in NYC can change its flip tax by amending the by-laws by receiving approval from a majority of the shareholders.

The board cannot unilaterally impose flip taxes without a shareholder vote. Most buildings will waive this cost

if you only transfer your co-op to a spouse, permanent companion, children, or immediate family.

Can you avoid paying it?

You cannot avoid paying the flip tax, but you can certainly try to mitigate your closing costs in other ways. For example, if you’re selling in a hot market, you can ask the buyer to cover it, or you can work with a broker like NestApple that charges lower commissions to sell your property.

While flip taxes started as a useful source of revenue for buildings that desperately needed it, they have since morphed into just another source of income for buildings that would otherwise find it. Regardless of the merits of the tax, NYC real estate has thoroughly integrated it, and all buyers should be aware of their potential financial impact.

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