What Is a Flip Tax in a Co-op and Who Pays It?
Demystify the flip tax, a unique fee encountered when selling co-op real estate. Understand its role, how it's determined, and who pays.
Cooperative (co-op) housing is a distinct form of homeownership where residents own shares in a corporation that holds title to the property, rather than directly owning real estate. This grants shareholders a proprietary lease for a specific unit. The “flip tax” is a fee encountered during the sale of a co-op apartment. Understanding this charge is important for anyone considering buying or selling a co-op unit, as it distinguishes co-op transactions from traditional real estate sales.
What is a Flip Tax
A flip tax is a transfer fee imposed by a cooperative corporation when a shareholder sells their unit. It is not a government-imposed tax; the entire fee is paid directly to the co-op’s treasury. This fee is essentially a condition of transferring shares from a departing shareholder to a new one.
The concept of a flip tax originated in the 1970s and 1980s, particularly when many rental buildings were converted into co-ops. These new co-ops often lacked substantial reserve funds, and the flip tax provided a mechanism to build financial reserves and fund necessary capital improvements. While more common in co-ops, some condominiums also have similar transfer fees. The exact policy for a flip tax is determined by each individual co-op’s board, typically outlined in its proprietary lease or by-laws.
Why Co-ops Charge a Flip Tax
Co-ops implement a flip tax to enhance their financial stability and benefit the entire community. The funds collected from these fees are directed into the co-op’s general operating budget or, more commonly, into its reserve funds. This revenue stream allows the co-op to finance building maintenance, undertake significant capital improvements, and strengthen its overall financial health without increasing monthly common charges or levying special assessments on existing residents.
Charging this fee to departing shareholders ensures that those who have benefited from the co-op’s amenities and services contribute to its long-term viability upon exit. This approach helps to subsidize maintenance costs for all residents, making the co-op a more attractive and financially sound place to live. Additionally, flip taxes can discourage very short-term ownership, fostering a more stable resident base within the cooperative community, which reduces the potential for speculative “flipping” of units.
How Flip Tax is Calculated
The calculation method for a flip tax varies significantly between co-op buildings, as each co-op board establishes its own policy. One common approach is a percentage of the gross sale price, typically ranging from 1% to 3.5%. For example, a co-op might charge 2% of the total amount for which the unit is sold.
Another method bases the fee on a percentage of the seller’s profit from the sale, where “profit” usually refers to the difference between the current sale price and the original purchase price. A fixed fee per share is also a common calculation, where the fee is determined by multiplying a set dollar amount by the number of shares allocated to the unit being sold.
Some co-ops may instead charge a flat fee per transaction, which is a set dollar amount regardless of the sale price or number of shares. A sliding scale might be employed, where the percentage or fee decreases the longer an owner has resided in the building. It is also possible for a co-op to use a hybrid format, combining two or more of these methods.
Who is Responsible for the Flip Tax
The responsibility for paying the flip tax most commonly falls upon the seller of the co-op unit. This is because the flip tax is typically viewed as a cost associated with transferring the shares of the cooperative corporation from the seller to the buyer. The payment is made directly to the co-op board or its managing agent at the time of closing, not to a governmental entity.
While the seller is usually the party responsible, the payment obligation can sometimes be subject to negotiation between the buyer and seller. The specific terms regarding who pays the flip tax are often outlined within the contract for sale.
Regardless of any internal agreement, the co-op board ultimately requires the fee to be paid for the transaction to be finalized. For tax purposes, a flip tax can be included as a selling cost, potentially reducing the seller’s capital gains liability.