Finding that right apartment, condominium or co-op unit in New York can be akin to searching for the Holy Grail. Once you find the property that meets your requirements for location, layout and price you may need a moment of silence to celebrate.
Once your celebration is complete, reality can kick in. Is that price really accurate? Are there any hidden costs? One expense that may not be accounted for, particularly involving co-op units, is the flip tax.
What is a flip tax? Flip taxes are essentially transfer fees. These taxes developed in the 1970’s when rental buildings were getting converted into cooperative units. Unfortunately, not all the tenants within these buildings could afford the purchase price.
This was a problem. How could owners upgrade and convert the buildings reasonably? Thus, a compromise was met: a fair initial price would be offered to the tenants and, if the unit was later sold, a flip tax would apply at that transaction. This allowed the owners to build a reserve fund to pay for future repairs and improvements.
Is there just one type of flip tax? The flip tax applied to the transaction can vary. The Council of New York Cooperatives & Condominiums (CNYC) notes that this tax can come in many different forms. Three types to be aware of include:
- Flat fee. This form applies a simple, flat dollar amount per transaction. This form often benefits buildings where all apartments are similar in size.
- Percentage of sale. This type of flip tax is determined by applying a percentage of the gross sale price.
- Per share. This type of flip tax treats all shareholders equally. As such, each shareholder is taxed a fixed dollar amount per share.
The type of flip tax that applies to the transaction is generally governed by the language of the cooperative’s organizing documents.
Who pays the flip tax? Cooperatives generally expect the seller to pay the flip tax. However, the CYNC clarifies that the seller can include a provision within the contract used for the sale of the unit requesting the buyer cover these costs.
Is the flip tax easy to navigate? The flip tax can be a complicated part of this real estate transaction.
As such, those who are in this situation are often wise to seek the counsel of an experienced New York attorney for purchasing a co-op or condo to better ensure that their interests are protected.