Thursday, November 12, 2015

FLIP TAXES

Legal Line Question of the Week

 
Flip Taxes
Question
I am representing the owner of a co-op apartment that is 
in the process of selling her apartment.   The co-op 
board has just implemented a flip tax (the "Flip Tax") 
and the seller is concerned that the Flip Tax is 
going to decrease the value of her apartment.  
What are the steps that a co-op board must follow 
in order to implement a Flip Tax? Will the seller have 
to pay the Flip Tax when she sells her apartment?
Answer
A Flip Tax is a fee that a co-op charges (usually to the 
seller) upon the sale of the apartment. The general 
purpose of the Flip Tax is to increase revenue for 
the co-op without raising monthly maintenance fees. 
The origin of the Flip Tax dates back to the early days 
of co-op conversions when investors were buying 
co-ops (with no intention of living in the co-op) 
and then flipping" the apartment for a profit. 
The Flip Tax was a way for the co-op to get a share 
in the investor's profits.  In some cases, 
condominiums have also instituted Flip Taxes.

To implement a Flip Tax the co-op board must amend 
the co-op’s proprietary lease or the co-op’s by-laws. 
In order to amend either the proprietary lease or 
the by-laws, there must be an affirmative vote of 
the co-op’s shareholders (a change of this nature 
would typically require two-thirds of all shareholders 
to approve). Gathering this type of support can be 
difficult depending on the makeup of the co-op.  
Implementing a Flip Tax is predictably supported by 
those shareholders who are planning on living in 
the co-op for a long term and opposed by those 
shareholders who intend to sell in the near future.

Whether the seller is going to be required to pay 
the Flip Tax will depend on the terms and conditions 
of the co-op’s Flip Tax provision. For example, 
the co-op’s Flip Tax provision might state that it 
does not apply to shareholders who enter into contracts 
of sale within 60 days of the adoption of the Flip tax. Alternatively, the Flip Tax may apply to all sales 
closed after the implementation of the Flip tax.  
Thus, in order to determine whether the Flip Tax 
applies to the seller, you must look to the terms 
of the relevant provision in the co-op’s by-laws or 
proprietary lease.  

Important Tip:  Co-ops may use a variety of 
formulas to calculate a Flip Tax. Generally, 
this calculation is based on either a set percentage 
of the sales price, a set number of dollars per 
shares sold, or a percentage of the profit netted 
from the sale. Some co-ops have also tied the 
Flip Tax percentage to the seller’s length of 
ownership of the co-op.  For example, a shareholder 
who has lived in the co-op for a longer period of time 
(i.e. ten years) may pay a smaller Flip Tax than 
a shareholder who has lived in the co-op for a shorter 
period of time (i.e. one year). 

By: Neil B. Garfinkel, 
REBNY Broker Counsel
Partner-in-charge of real estate and banking practices
at Abrams Garfinkel Margolis Bergson, LLP
 

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