How Flip Taxes Work in NY
As many co-ops face declining sales and rising maintenance costs, some are turning to “flip taxes” – fees that penalize new buyers who sell their apartments shortly after buying them – as a way to bolster the building’s reserves. But while many experts believe that this strategy is a viable one, the concept is not without its critics. In fact, some shareholders are so unhappy with the idea that they are willing to vote against a flip tax – even though the funds it generates could help them avoid paying higher maintenance or assessments in the future.
The origin of flip taxes lies in the 1970s, when many occupied rental buildings were converted to cooperatives and needed major capital investment to remain in good condition. Attorneys representing residents in those conversions came up with the idea of a flip tax as a means to raise money to pay for those investments.
Initially, the flip tax was based on a percentage of the seller’s net profit. But that proved too difficult to enforce, so some buildings started charging a flat fee per apartment sold. But a flat fee can be unfair to those who lose money on their sale, and it can also encourage collusion between sellers and buyers to beat the system.
Another problem is that a flat fee may be a regressive form of flip tax. If you have a two-bedroom and it’s selling for $500,000, but someone sells a three-bedroom for the same price, they should pay the same flip tax. Moreover, flat fees can be subject to inflationary pressures that can make them obsolete over time, he adds.
A more acceptable form of flip tax is a formula based on the gross sales price of the unit, which can be easier to enforce, Weinstein says. But a building must carefully define exactly what that formula will be, and it must be strictly and consistently applied. For instance, a building that allows for a deduction from the sales price for improvements made to an apartment must ensure that the cost of those improvements is documented and verified by evidence such as receipts and invoices.
Assuming that a co-op can successfully implement a flip tax, it’s important for the board to communicate with shareholders to convince them to support the policy. A letter should be sent to all shareholders prior to the vote explaining the reasons for the change, and any specific capital projects the building is aiming to fund with the new revenue. In addition, a grace period should be built into the amendment so that any shareholders who currently have their apartments in contract can sell them before the flip tax goes into effect. This will help to ensure that the vote has a high turnout. Cooperatives in NY can only impose a flip tax by amending their proprietary lease and by-laws, which requires the approval of a majority of the shareholders.
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