The NYC flip tax is a fee paid at closing to a co-op corporation for selling your co-op apartment. NYC flip taxes are also known as transfer fees and were first implemented in the 1970s and 1980s as a way to generate capital for co-op buildings so that they could invest in major capital improvements without increasing maintenance fees for their shareholders (something no shareholder enjoys).
Although you used to only see flip taxes when selling a co-op, they are becoming more common in condos as well as they can generate additional income for the building. A typical NYC flip tax can generate substantial incomes for buildings, as well as discourage buyers and investors from buying and selling co-op apartments with the intention of making a quick profit, especially with HDFC coops.
Keep in mind that all sales in New York City are subject to both NYS and NYC government transfer taxes. While a flip tax is sometimes referred to as a "transfer tax" it is technically a "transfer fee" and a separate fee from the New York transfer tax. As the flip tax is considered a fee and not a tax, it is not deductible as a property tax.
Typically, the flip tax is paid by the seller. However, there are a few exceptions where the buyer may have to pay this fee or even where the buyer and seller agree to split the fee. The sales contract will indicate who is responsible for this fee. Generally, the board is not interested in who is paying the fee as long as the fee is paid.
According to the New York Business Corporation Law, unless the flip tax was listed in the original offering plan for the building, a flip tax can only be implemented by making an amendment to the building’s proprietary lease or by-laws, which usually requires 2/3 shareholder approval.
The flip tax is charged directly by the cooperative building (or condominium), which means that the fees range from building to building. You can typically find out how much the flip tax is by looking at the building’s by-laws. However, sometimes, the flip tax will be listed on a co-op’s purchase application. If you have any questions about the flip tax, you can always have your attorney reach out to the managing agent, who should disclose the fee.
Flip taxes are typically calculated at 2% of the gross sale price but can range from 1% to 3%. However, HDFC co-op, where flipping is highly discouraged, can have flip taxes as high as 20-30 percent (or even higher).
Flip taxes in NYC can be structured in any of the following ways:
- Percentage of the gross sale price: for example 2%
- Set dollar amount per co-op share owned: for example $50 per share 100 x $50 = $5,000
- Flat-fee flip tax: for example $5,000
- Percentage of sale profits: for example 15% of gross profits
- Sliding scale: for example, if you’ve been in the building less than one year 5% if you’ve lived in the building 1-4 years, 2.5%, if you’ve been in the building 4+ years 1%
- A combination of any of the above
While it might be frustrating to need to pay a 1% - 3% flip tax in NYC, this fee also has its benefits. By charging a flip tax, co-op buildings can help sure up their finances, lowering monthly maintenance fees for residents, and also prevent excessive speculation from investors and house flippers. Compared to other NYC closing costs, which are mostly in place to fund state coffers, flip taxes aren't that bad.
1. Are Real Estate Flip Taxes in NYC Tax Deductible?
For tax purposes, flip taxes are not tax-deductible as they are considered to be transfer fees and not a tax. However, you can deduct the amount of a flip tax from your capital gains, as a cost of the purchase or sale which reduces your net proceeds, which will, in turn, reduce your overall tax liability.
2. Can I Avoid a NYC Flip Tax?
There isn't any easy way to avoid paying a flip tax in NYC, besides avoiding selling your property altogether. One notable exemption is if you are the sponsor you will probably be exempt from paying a flip tax. Nevertheless, if for some reason you can convince a buyer to pay or split the flip tax with you, then this is typically the only way to avoid paying a flip tax as a seller.
3. Do You Pay a NYC Flip Tax When Transferring Ownership to Family?
The building’s proprietary lease or by-laws will explain whether a flip tax will be charged on transfers to family members. Usually, most co-ops will waive the flip tax if you are transferring your co-op apartment to a spouse, domestic partner, or children. However, every building is different.
4. What's the Difference Between a Flip Tax and a Working Capital Fund Contribution Fee?
Working capital contribution fees are non-refundable fees paid by buyers in new construction buildings. The purpose of the fee is similar to flip taxes in that the money is used for the building’s operating expenses. Most working capital fund contributions are equivalent to one to two months of maintenance costs in co-ops or one to two months of common charges in condos.