Tips & AdviceWhat is the New York City Flip Tax?

What is the New York City Flip Tax?

Some condo or co-op sellers in New York City may need to add a flip tax to their list of closing costs. Spoiler alert: Flip tax payments won’t go to the city or state government. A flip tax is a term used to describe the fee that co-op and condo buildings charge when a unit transfers ownership. In New York City, sellers typically bear this financial responsibility and must pay a flip tax when selling or transferring ownership of their unit.

What is Flip Tax?

Throughout the 1970s and 80s, New York City began taking possession of older apartments and turning them into co-ops for low-income residents through the city’s Housing Development Fund Corporation (HDFC). The HDFC co-ops added a flip tax to discourage residents from buying low-priced properties with the sole intent of putting them back on the market and gaining a hefty profit from a higher sales price.

When non-HDFC rental buildings began converting from apartments to co-ops and condos, they also considered charging a flip tax. Many of these older buildings needed to cover the cost of capital improvements. Charging sellers a flip tax to cover the expense of maintenance and repairs became a popular alternative to issuing special assessments. Flip taxes also help to limit increases in monthly maintenance fees for current owners.

As time wore on, flip tax, or transfer fees, became an accepted part of selling a co-op in New York, though only a few other areas of the country follow this practice. Although co-op buildings tend to charge flip taxes more frequently than condos, some condo buildings also include similar fees in their by-laws.

Learn more: What are the Benefits of Buying a Co-op vs. a Condo?

How Much is Flip Tax?

If you see a flip tax listed among your closing costs and want to understand how to calculate this fee, start by reviewing your building’s proprietary lease or bylaws. The governing documents must disclose any flip taxes charged when a unit sells. When not included in the original rules, an amendment must pass by a vote from current owners.

Condo and co-op flip tax calculations vary between buildings, but generally, the amount of the fee lands between 1 – 3% of the sales price. For HDFC condos, flip taxes can run much higher. Some of the most common calculation methods include:

Flat fee

The condo or co-op charges the same fee for every seller, regardless of sales price, size of the unit, or net profit from the sale.

Percentage basis

The flip tax calculation applies a specified percentage to either the sales price or the seller’s determined profit from the sale.

Amount per share

Sellers pay a stated amount multiplied by the number of shares they own in the building.

Take note that the flip tax calculation may also combine these methods, such as a flat fee plus a per-share amount.

Flip Tax versus Transfer Tax

In addition to flip taxes, New York City sellers may also pay real estate transfer taxes. The city and state levy transfer taxes paid at closing.

The New York City Real Property Transfer Tax (RPTT) applies to all transfers or sales of real estate greater than $25,000. The current rate of 1% applies to transfers of less than $500,000. For transactions of over $500,000, the tax equals 1.425%.

New York state adds another 0.4% of transfer taxes for real estate sales below $1,000,000. Any property sold for over $1,000,000 becomes subject to the city’s mansion tax.

Typically, the seller pays transfer taxes unless they negotiate within the purchase agreement for the buyer to cover a share of this expense.

Is it Possible to Avoid or Reduce a Flip Tax?

As a seller, you may not have budgeted the extra expense of a flip tax. Check your co-op’s proprietary lease or your condo’s by-laws for rules about the flip tax to make sure you genuinely owe the amount listed in your purchase agreement or closing documents. If a flip tax amendment passed after you purchased your unit, ask the board or your property manager about any possible exemptions for your unit.

Most of the time, the seller pays any flip taxes due on sale. Sometimes, buyers must pay a different fee, such as a capital contribution, to help defray future maintenance and repair costs. Again, checking your building’s governing documents for exact wording can help you understand the nature and amount of any fees.

Unfortunately, if your building charges a flip tax for your unit, you can’t do much to avoid paying this amount. If the fee raises concerns, consider adding this amount to your listing as the buyer’s responsibility or asking the buyer to split the flip tax. In a strong seller’s market, a buyer may consider contributing toward the flip tax fee.

When accepting a buyer’s offer, take the flip tax into account. Make sure you’re happy with the sales price. If the flip or transfer taxes still pose a burden or cut too far into your proceeds from the sale, consider further negotiations. You may also ask your agent about any wiggle room in their sales commission to help compensate for the flip tax amount.

Once you decide how to handle the flip tax payment, review the final purchase agreement and closing statements carefully. These documents should properly reflect each party’s responsibility regarding flip fees and transfer taxes. You don’t want to arrive at the settlement table with the matter unresolved and take a chance that your sale might fall through at the last minute.

Conclusion

Both New York City sellers and buyers should understand the ins and outs of the flip tax, as it could affect a property’s profitability and marketability. Sellers should know about their flip tax before they place a property on the market, and buyers can ask their real estate agent about the extra expense if they plan to sell down the line. If you want to buy a property with a flip tax, ask your real estate agent for their opinion on any impact it might have on a future sale.

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