There are two things to know immediately about NYC Co-op Flip Taxes. They are not taxes and they do not apply to house flippers.
Flip taxes are a fee charged to co-op owners who sell their co-op. In this way, they are similar to transfer taxes. They are a way of increasing the co-op’s financial reserves without resorting to unpopular maintenance increases or assessments. Instead, the people who leave have a price to pay, so the people who stay don’t have to incur it.
The background to flip taxes
Flip taxes came about when rental buildings in bad condition were converted to co-ops and were in need of improvements. The tenants in these buildings could not afford to make improvements yet but because of the accrued equity could sell their apartments at a profit. That was the win-win. The tenants realized they could benefit financially from selling apartments they’d lived in for years and the building could benefit from being upgraded.
Types of flip taxes
There are several different types:
1) A flat fee (ie $2500)
2) A dollar percentage based on the sales price (usually 1 – 3 percent)
3) A percentage based on the net profit of the sale (based on the flip tax amount multiplied by the number of shares assigned to your unit)
4) A fee based on the duration the seller has owned the apartments (shorter time periods of ownership typically bring higher fees, and can vary from co-op to co-op)
5) A hybrid of a flat fee (say $2000) plus the number of shares (ie $25 per share).
In 1986 flip taxes were sanctioned by NY State Legislature which acted on a proposal from the Council of New York Cooperatives and Condominiums. It defined in what way co-ops could legally impose these fees. Specifically, the law allows such an assessment if either of the following applies:
- if it is sanctioned in the co-op’s proprietary lease
- if the lease is amended with more than two-thirds of shareholders approving.
Are flip taxes in NYC tax deducible
If you flip tax is stated on your settlement sheet as a cost of the sale you may be able to reduce your capital gains tax. However, an attorney and an accountant may be able to offer better advice.
Do I have to pay a flip tax if I am transferring my co-op to a family member?
Most co-ops will waive the flip tax if the co-op is being passed on to a family member. However, it is not a certainty as each co-op has its own language and exceptions. It is best to check in the proprietary lease and By-laws.