Are “flip taxes” legal?

On Behalf of | Jul 4, 2024 | Uncategorized |

The short answer is that “flip taxes” are legal so long as they were properly adopted. Flip taxes, also called transfer fees, were often implemented in the 1970s and 1980s. However, a co-op board can only impose a flip tax if permitted in the original offering plan or by a proper amendment to the proprietary lease. The common form of proprietary lease used by many buildings does not provide the authorization for imposing a flip tax.  Any amendments to the proprietary lease cannot be made unilaterally by a co-op board. Instead, most proprietary leases require approval by a vote of the tenant-shareholders owning two-thirds of the co-op’s shares.

Who pays it?

The co-op typically imposes the flip tax on the seller.  There is nothing which prohibits the purchaser and seller from negotiating in their contract of sale who will pay the flip tax at closing or how much of the flip tax each party will pay.

A lucrative revenue stream

Flip taxes were introduced as a way for co-op boards to refill their reserve funds while avoiding assessments, borrowing and maintenance hikes. They now have become a vital source of financial stability for co-ops. By requiring apartment sellers to contribute a piece of the closing price, co-op boards can generate capital for significant improvements without adding the cost of those repairs to maintenance fees. Flip taxes are often calculated as a fixed amount per share or as a percentage of the sales price or the profit being made by the seller.  Flip taxes have the added benefit of discouraging buyers and investors from buying and selling co-op apartments to make a quick profit.

Condos now embracing it

Recognizing the difficulty condominiums have in maintaining their reserve accounts and their limited ability to borrow money, condos in NYC are also increasingly adopting flip taxes to raise funds for building reserves. With rising building expenses, such as increased insurance costs, repair costs and staff overhead, more buildings are considering transfer fees to ease repair budgets without raising common charges. Due to inflation and other rising expenses, debates about implementing transfer fees are becoming more frequent as a strategy to offset financial pressures.  As in a co-op, a condo board does not have the ability to unilaterally impose a flip tax; the unit owners must vote to amend their by-laws to allow one to be charged.

Sellers may challenge it

Flip taxes are still a source of debate today. The fact is that co-op boards cannot just arbitrarily add them to an upcoming sale. The procedure followed by the board and the calculation of the flip tax must comply with the corporate documents.   Shareholders who faced invalid flip taxes have been successful in court. Our partner Ruta Behrend was recently quoted in the New York Times Real Estate Section  and Habitat Magazine  as saying “You may have grounds to challenge its validity in court after closing,”  Moreover, your lease could also enable you to have the board pay the legal fees you incur if you successfully challenge the flip tax in court.