Flip Taxes

May 24, 2018 | By Charles Botensten

Q: I am representing the owner of a co-op apartment that is in the process of selling her apartment.   The co-op board has just implemented a flip tax (the "Flip Tax") and the seller is concerned that the Flip Tax is going to decrease the value of her apartment.  What are the steps that a co-op board must follow in order to implement a Flip Tax? Will the seller have to pay the Flip Tax when she sells her apartment?

A: A  Flip Tax is a fee that a co-op charges (usually to the seller) upon the sale of the apartment. The general purpose of the Flip Tax is to increase revenue for the co-op without raising monthly maintenance fees. The origin of the Flip Tax dates back to the early days of co-op conversions when investors were buying co-ops (with no intention of living in the co-op) and then "flipping" the apartment for a profit. The Flip Tax was a way for the co-op to "share" in the investor's profits.  In some cases, condominiums have also instituted Flip Taxes.

 

To implement a Flip Tax the co-op board must amend the co-op’s proprietary lease or the co-op’s by-laws. In order to amend either the proprietary lease or the by-laws, there must be an affirmative vote of the co-op’s shareholders (a change of this nature would typically require two-thirds of all shareholders to approve).   Gathering this type of support can be difficult depending on the makeup of the co-op.  Implementing a Flip Tax is predictably supported by those shareholders who are planning on living in the co-op for a long term and opposed by those shareholders who intend to sell in the near future.

 

Whether the seller is going to be required to pay the Flip Tax will depend on the terms and conditions of the co-op’s Flip Tax provision. For example, the co-op’s Flip Tax provision might state that it does not apply to shareholders who enter into contracts of sale within 60 days of the adoption of the Flip tax.  Alternatively, the Flip Tax may apply to all sales closed after the implementation of the Flip tax.  Thus, in order to determine whether the Flip Tax applies to the seller, you must look to the terms of the relevant provision in the co-op’s by-laws or proprietary lease.  

 

Important Tip:  Co-ops may use a variety of formulas to calculate a Flip Tax. Generally, this calculation is based on either a set percentage of the sales price, a set number of dollars per shares sold, or a percentage of the profit netted from the sale. Some co-ops have also tied the Flip Tax percentage to the seller’s length of ownership of the co-op.  For example, a shareholder who has lived in the co-op for a longer period of time (i.e. ten years) may pay a smaller Flip Tax than a shareholder who has lived in the co-op for a shorter period of time (i.e. one year). 

 

The Legal Line Question by:
Neil B. Garfinkel
REBNY Broker Counsel

Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP