The Flip Tax: Everything NYC Buyers Need To Know

Yoreevo > Buying > The Flip Tax: Everything NYC Buyers Need To Know
Seller trying to move from his building but there is a toll labeled "flip tax" he has to pay

After a little bit of homework, most buyers and sellers learn the basic taxes associated with buying, owning and selling real estate in New York City. There’s the mansion tax, transfer taxes, mortgage recording tax and property taxes. The one “tax” that is often a surprise is the flip tax. All buyers, especially co-op buyers, need to know about flip taxes as they can severely alter the economics of buying apartments in NYC.

Table of Contents:

What Is A Flip Tax in NYC?
How Is A Flip Tax Calculated?
How Much Is A Typical Flip Tax?
Who Pays A Flip Tax In NYC?
What Is The Rationale For A Flip Tax?
Can A Co-op Or Condo Change Its Flip Tax?
Are Flip Taxes Good Or Bad For Property Values?
Are Flip Taxes Tax Deductible?
What Are Some Ways To Avoid Paying A Flip Tax?
What’s The Difference Between A Transfer Tax And Flip Tax?
What’s The Difference Between A Flip Tax And Working Capital Contribution Fee?
Where Are Flip Taxes Disclosed?
Can a Flip Tax Be Good?


What Is A Flip Tax in NYC?

A flip tax is a type of transfer fee imposed by the building. It is typically paid by the seller but if otherwise negotiated, it can be paid by the buyer. Despite the name, it is not actually a tax. 100% of the tax goes to the building, not the government. The government is not involved whatsoever. While significantly more common in co-ops, flip taxes can be found in both NYC co-ops and condos.

The term “flip tax” dates back to the 1980’s when rental buildings were being converted to co-ops. As previous rental buildings, they didn’t have much of a reserve fund. One way these new co-ops looked to build such a fund was with the tax. Original owners of these co-op units got very good prices and, if they chose to, could “flip” their apartment after the conversion was completed, selling at market rate and making a nice profit. Imposing a tax on that “flip” was a way for the co-op to raise money for the building’s reserve fund and make necessary capital improvements without assessing shareholders.

Since that time, existing co-ops have adopted these taxes simply as a way to generate revenue. Even condos started to get in on the action. Most buildings have sound financials so the purpose of a the tax is simply to generate revenue.

How Is A Flip Tax Calculated?

It’s important to note there is no uniform flip tax. Unlike the other types of actual taxes above, each flip tax is created by each building. Most are calculated as a fee based on the percentage of the gross sale price but it can also be a fixed dollar amount (either absolute or per share), a percentage of the seller’s net profit or a scale depending on how long the seller owned the apartment. If a building wanted to make the tax depend on what day of the week the apartment is sold, they could. As long as it is in the building’s original offering plan or has been approved by the building’s owners, the tax is legitimate.

How Much Is A Typical Flip Tax?

Based on Yoreevo's random sample of Manhattan co-ops, by far the most common flip tax is 2% of the sales price. Almost half of all co-ops sampled had a 2% flip tax. We also found the vast majority - about 90% - have some kind of flip tax.

Anecdotally, we'd say that's probably high as the data sampled is provided on a somewhat voluntary basis but 2% is certainly the most common flip tax rate and the majority of co-ops have them.

Before buying in a building with a flip tax, it’s important to realize there is no way to avoid it and it will likely absorb a noticeable portion of your capital gain. A few buildings in our sample charged 5% of the sale price!

For example, say you buy an apartment for $1,000,000 in a building with a 2% flip tax.

You hold it for five years and sell it for $1,200,000 so you owe $24,000 for the tax. $24,000 is a lot of money but compared to a gain of $200,000, you might not get too worked up. But don’t forget you paid $10,000 for the mansion tax when you bought, $22,000 for the transfer tax during the sale and possibly a mortgage recording tax on the way in.

It’s easy to see how that small-sounding 1% flip tax gets big quickly. In this scenario, it was 15% of your capital gain. Don’t make us do the math with a typical 6% broker fee included as well!

Who Pays A Flip Tax In NYC?

Just like other (real) taxes, the recipient of the flip tax - the co-op or condo - don’t care where the money comes from as long as it’s paid. That being said, the seller is expected to pay the tax.

While it doesn’t really matter, if anything, it makes more sense for the seller to pay the tax.

For example, say the seller of a $1,000,000 apartment wants the buyer to pay a 1% flip tax. If the buyer is financing, the bank will likely not finance the $10,000 flip tax. However, if the buyer pays $1,010,000 and the seller pays the tax, it’s part of the purchase price and can be financed. By having the seller pay, it also increases the reported purchase price of the apartment which is good for the new owner and other owners in the building.

What Is The Rationale For A Flip Tax?

We already touched on the origin of these taxes but what about today? Now that the co-ops have actually converted, why do the taxes still exist? What’s the justification for newly implemented flip taxes?

Yoreevo can point to two reasons flip taxes still exist.

First, the tax still discourages flipping. While most original co-op owners have sold by this point, you can still flip an apartment. Regardless of the owner, the tax discourages short term ownership periods. These taxes are just one of the many reasons short-term apartment ownership in NYC doesn’t make sense.

More practically though, there’s no reason for a building with the tax to shut it down. It’s a source of revenue that is baked into the building’s budget. If a vote to repeal the tax was proposed, obviously those looking to sell in the near term would support it and everyone else would oppose it. The latter is a much larger group so for both theoretical and practical reasons, these taxes are usually here to stay once they’re implemented.

Can A Co-op Or Condo Change Its Flip Tax?

Absolutely. Like everything in a co-op or condo’s bylaws, if enough owners in the building vote on a proposal, it is enacted. How this is handled varies depending on the proposal but even in 2018, we see buildings implementing the taxes. It’s not easy to add the tax to a building’s bylaws though. After a condo or co-op board proposes the tax, usually at least two-thirds of votes must be in favor to pass.

While it has probably happened, we are not aware of a specific building where a flip tax has been repealed. For the reasons mentioned above, it’s hard to do.

Are Flip Taxes Good Or Bad For Property Values?

Recently, Yoreevo represented a buyer in a building that was proposing the tax. Current owners would be grandfathered in so only buyers purchasing after a certain date would pay the flip tax when they sold. In the letter introducing shareholders to the vote was -


All caps was their emphasis. Clearly, the person who wrote this letter wanted shareholders to vote for the tax. While technically true - current owners would not pay the flip tax - the letter did not address the potential impact on their property values.

If a buyer knows they are going to pay 1% when they sell, all else equal, they are going to pay 1% less for the apartment so in Yoreevo’s opinion, even this tax affected current shareholders.

But it’s not all bad. Since the tax is going to the building, maintenance will be lower which is attractive to buyers.

Are Flip Taxes Tax Deductible?

Flip taxes are not tax deductible because they are not a tax. As a transfer fee though, they do reduce your net proceeds and therefore reduce any capital gain. In that regard, they are similar to New York State and New York City transfer taxes.

What Are Some Ways To Avoid Paying A Flip Tax?

Much like state and city transfer taxes, there is no way around the tax. If you want to sell, it must be paid. The only real escape for a seller is to ask the buyer to pay which is rare.

What's The Difference Between A Transfer Tax And Flip Tax?

Both transfer taxes and flip taxes have the same result - you cannot sell a property without paying them. The only difference is who is imposing the fee. Transfer taxes are a real tax and the money goes to New York State and New York City. A flip tax, however, is paid to the seller’s old building.

What's The Difference Between A Flip Tax And Working Capital Contribution Fee?

Originally, back in the 1980s these taxes were also the original working capital contribution fees. Working capital contribution fees are paid by buyers of new construction to build the reserve fund of the building just like flip taxes during the wave of co-op conversions.

A working capital contribution fee is usually a month or two of maintenance that is used to run the building going forward. It is not a deposit - you don’t get it back when you sell - so it should be treated as another closing cost for new development.

Where Are Flip Taxes Disclosed?

Right behind the sublet policy, “Does the building have a flip tax?” is the most common question buyers have about co-ops. With so many dollars at stake, it’s surprising the tax does not need to be advertised. In fact, you usually won’t even see the tax disclosed on the broker portal. There isn’t even a field for it.

Based on Yoreevo’s experience, we’d say most of these taxes are not disclosed until the deal sheet is sent out or the buyer’s attorney is doing his or her due diligence. It is a big problem, one that results in a lot of buyer frustration, and something the Real Estate Board of New York should address.

Can A Flip Tax Be Good?

The good news for buyers surprised by the tax late in the process is that while most taxes are bad, that’s not necessarily the case with the tax. Remember this tax gets paid back to the building so remaining owners benefit each time the tax is paid. As a source of revenue for the building, flip taxes essentially subsidize maintenance for remaining owners

While each building’s situation will be different depending upon the amount of the tax, the number of apartment sales per year and other factors, Yoreevo finds it helpful to go through this illustrative example with buyers looking at a building with a flip tax -

Units in the Building 100
Value of Each Apartment $1,000,000
Flip Tax 1%
Annual Sales 10 Apartments

In that scenario, $10,000,000 of apartments would be sold each year, generating $100,000 of flip tax for the building. Spread among the 100 apartments (because new owners benefit as well), each owner avoids paying $1,000 of maintenance per year because of the tax.

While the math is never that simple, your analysis when considering an apartment with the tax can be. By far and away, the most important variable is how long you plan to own the apartment. If only for a few years, the tax is very much a cost and you should treat it as such. But if you plan to own for a long time, it very well may be beneficial.

Flip taxes started out as a practical source of revenue for buildings that desperately needed it. They have since morphed into just another source of revenue for buildings that would otherwise find it. Regardless of the merits of the tax, they are thoroughly integrated into NYC real estate and all buyers should be aware of their potential financial impact.

Disclaimer: This post should is meant for informational purposes only and should not be relied upon for financial guidance. Please contact a qualified accountant and/or attorney if you have any questions about your particular situation.
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