What Is a Flip Tax in NYC and Who Is Responsible for It?

A “flip tax” is a term frequently encountered in real estate transactions, particularly within cooperative (co-op) apartment sales. Despite its name, this charge is not a government-imposed tax collected by a city or state. It functions as a private fee levied by the cooperative corporation itself. The primary purpose of this fee is to enhance the building’s financial stability, often contributing to its reserve funds, capital improvements, or ongoing maintenance.

Defining the Flip Tax

A flip tax, more accurately termed a transfer fee, is a charge collected by a cooperative corporation when shares of stock associated with an apartment are sold. This fee serves as a financial mechanism for the building, providing a direct revenue stream that can be allocated for various purposes, such as funding capital improvements, covering building maintenance expenses, or bolstering the cooperative’s financial reserves. The term “tax” can be misleading because, unlike property taxes or government transfer taxes, the proceeds from a flip tax remain entirely within the cooperative, not remitted to any governmental body.

The legal basis for imposing a flip tax is typically established in the cooperative’s foundational documents, specifically its proprietary lease or by-laws. These documents outline the cooperative’s right to assess such a fee and the method by which it is calculated. The concept of a flip tax gained prominence during the 1970s, as many rental properties transitioned into cooperative ownership structures, creating a need for new ways to build and maintain financial stability for these newly formed co-ops.

When and How It Is Imposed

The imposition of a flip tax is directly triggered upon the sale or transfer of a cooperative apartment’s shares. This means that when a shareholder decides to sell their unit, the cooperative board assesses this fee as part of the transaction’s closing costs.

The specific methodology for calculating the flip tax varies considerably from one cooperative to another, as each board establishes its own policy. Common calculation methods include a percentage of the gross sale price, typically ranging from one to three and a half percent. Some cooperatives may instead calculate the fee as a percentage of the seller’s profit or capital gain from the sale.

Other approaches involve a fixed dollar amount per share owned by the seller, or a flat fee applied uniformly to all sales regardless of price or share count. Additionally, some cooperatives implement a sliding scale, where the percentage or amount of the flip tax may decrease the longer the seller has owned the apartment, encouraging long-term residency.

Party Responsible for Payment

The responsibility for paying the flip tax falls almost universally on the seller of the cooperative shares. This arrangement is the standard practice in most cooperative transactions. The cooperative board views this charge as a fee against the departing shareholder, reflecting their contribution to the building’s financial well-being during their period of ownership. While the seller is typically responsible, the specific terms of payment can sometimes be negotiated between the buyer and seller as part of the sale contract. However, even if negotiated otherwise, the cooperative’s by-laws or proprietary lease will ultimately dictate the fee structure and the party from whom the cooperative collects the payment.

Circumstances for Exemption

While many cooperative sales incur a flip tax, certain situations may qualify for an exemption or a reduction, depending entirely on the cooperative’s specific governing documents. These exemptions are at the discretion of individual cooperative boards and are detailed in their proprietary lease or by-laws.

Common scenarios for potential waiver or reduction include transfers of ownership to immediate family members, such as a spouse, children, or domestic partner. Transfers into a trust for estate planning purposes may also be exempt. In some instances, cooperatives might offer a reduced flip tax for long-term residents through a sliding scale, incentivizing extended ownership.

Prospective sellers should consult their cooperative’s specific documents to understand any applicable exemptions before initiating a sale.