The "Flip Tax" Creative Financing or a Coop Cop Out ?

By
Real Estate Agent with The Corcoran Group

The flip tax is a transfer fee that many new york coops and condos impose on shareholders and owners. In the early 80's when many rental buildings converted, huge profits were being made by former renters who bought their units at inside prices and then resold them. Called "flipping" The boards decided to impose the transfer fee and call it a flip tax on sellers to disuade flipping.

Due to high oil costs, insurance particularly terrorist insurance, neccessary repairs and increases in expenses many buildings need to build their reserve fund and are trying to impose flip taxes. In order for the flip tax to pass 2/3 of the shareholders have to vote in favor of it. It requires a quarum. An absent vote is a no vote. Condop buildings often have investor owners from out of town.

There are several ways they try to impose the flip tax. There are arguments on both sides for every type. In my opinion none are good for sellers. In my opinion it is better to help pay the buildings expenses when you live there and can enjoy the improvements and not when you sell. Why should a seller give a going away present to the coop because the coop is not fiscally disiplined.

It is an easy way to get 2% sometimes 3% of a unit's sale price. The average apartment in Manhattan is over $1 million. Do the math. Buildings have figured 5-10 transfers a year what a nice windfall for them.

  1. A percentage usually 2% but sometimes 3%
  2. A flat fee
  3. Percent of profit
  4. Tax per share  Dollar amount per share

Management companies and boards lobby the shareholders why a flip tax is good. They argue if they have this reserve fund from the flip tax they won't have to raise maintenance or have asessments. Elederly people  planning on leaving the apartment to their children don't care as that is an exemption. People who recently bought and have to be relocated feel it's unfair as they have not been there that long. Long time residents feel they stuck it out and have already paid for all assesments over the years.

The only real fair way I beleive is per share. The way the shares were allocated in the offering plan. So if you made renovations to improve your apartment and or hired a great real estate broker who sold for a higher price than other apartments with the same amount of shares you deserve that profit not the building.

Buildings need to be managed better. There are so many ways to cut back. Boards should be more accountable to shareholders. Costly mistakes the board made on renovations, refinancing at high rates with prepayment penalties etc. should not be the resposibility of a seller. 

  Flip Tax, Updates and related posts

flip tax: REBNY (Real Estate Board of New York) Saves Flip Tax - 02/02/11
flip tax: Manhattan Real Estate Q&A: What is a Restrictive Covenant? - 01/08/11
flip tax: Real Estate and Politics is LOCAL: In New York It's Called A "Flip Tax" - 10/27/10

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Anonymous
Anonymous
karim

Hi Mitchell,

 This is an HDFC (Housing Development Fund Corporation) with no income restriction. Its for low and middle income people and this building was subsidised by the city. 70% is the flip tax imposed by the coop to the seller. It is not the tax deductable part of your monthly maintenance fee. I was stuned when the broker told me that.

This flipo tax is 70% payed by the seller. 40% is city tax for the help reshapping the building (it

expire in 14  years. 30% is the coop tax. I have never seen or heard anything like this before.).

it means, I will have to wait 14 years before i can sell otherwise I will have to pay 70% on the profite

instead of 30% on the profit to the coop.

does this make sense to you?

I can email you the address.

 

thanks

 

Feb 01, 2007 01:51 PM #9
Rainmaker
511,012
Mitchell J Hall
The Corcoran Group - Manhattan, NY
Lic Associate RE Broker - Manhattan, NYC

Karim,

It's a good deal if you can stay there for 14 years. They are selling it below market value because the city is subsidizing it.

I sold a 1 Bedroom condo in West Harlem in 2003 for $265K. The seller paid $90,000 for the unit in 1990. It was an HPD building that the city subsidized also with a 14 year expiration.

If you sold prior to the 14th year the sale price had to be based on the consumer index plus inflation. It also had an income restriction on the buyer (they couldn't make more than $144,000)

If the seller could have waited another year he would have been able to sell for more and with no income restrictions.

Now that the 14 year expired units in that building are selling for $500,000.

Feb 14, 2007 09:11 AM #10
Anonymous
Anonymous
jon
Anyone who has bought in my building, whether it's one year or 15 has enjoyed enormous profits, in the 100,000's range. Long range owners are grandfathered back to 1996, Our flip tax is designed to the flip a fast buck guys, who come in do their rennovations inconvenincing the rest of us, crapping up the halls with construction debris and ruinng expensive the expensive wool carpeting and the english wallpaper for a fast profit. They deserve the flip tax, with the enormous profits they have made, why should we the remaining tenants suffer their negligence, this goes from the dog urine in the halls, sloppy housekeepers dripping stinking kitty litter down the steps and throwing their garbage anywhere, ignoring recycling rules. They are short term investors, who don't give a damn about the building and our fines are a minor annoyance they just absorb and ignore. ( Our flip tax is tiered depending on length of time in the building) 
Give me an argument for that one
Jon/4/4/2007
Apr 07, 2007 11:02 PM #11
Rainmaker
511,012
Mitchell J Hall
The Corcoran Group - Manhattan, NY
Lic Associate RE Broker - Manhattan, NYC

Jon,

I don't have an argument. I think a tiered flip tax based on the legnth of time in the building and having long term owners grandfathered in seems fair. The original intent in many buildings was to prevent flippers. Some buildings however try to impose a flip tax because the building does not have good financials.

Many coops in Manhattn do no allow investors, pied-a-terres or sublets and have strict regulations regarding renovations because they are concerned about the quality of life for the existing residents. I know buyers who have been turned down from buildings because they discussed their major renovation plans at the board interview.

Apr 08, 2007 08:32 AM #12
Anonymous
Anonymous
Thomas
My flip tax is 3 % of the gross profit, is that 3 % of the sale, or 3 % for the difference from when I purchased it.
Nov 05, 2007 03:00 PM #13
Rainmaker
511,012
Mitchell J Hall
The Corcoran Group - Manhattan, NY
Lic Associate RE Broker - Manhattan, NYC

Hi Thomas.

3% of the gross profit is on your profit yes the difference from when you purchased it. You might be able to deduct capital improvements and expenses from the gross profit depending on your proprietary lease.

Nov 05, 2007 05:50 PM #14
Anonymous
Anonymous
Thomas

thank you Mitchell. My wife and I are about to go into contract and we kept getting different answers.

Thomas

Nov 05, 2007 06:05 PM #15
Rainmaker
511,012
Mitchell J Hall
The Corcoran Group - Manhattan, NY
Lic Associate RE Broker - Manhattan, NYC
Your welcome Thomas, Good Luck.
Nov 05, 2007 06:32 PM #16
Anonymous
Anonymous
Ed
We recently sold our apartment in NYC and were subjected to a flip tax.  Are these taxes deductible for IRS purposes?
Feb 29, 2008 07:56 PM #17
Rainmaker
511,012
Mitchell J Hall
The Corcoran Group - Manhattan, NY
Lic Associate RE Broker - Manhattan, NYC

Ed, I think it is possible to be deducted as an expense in the sale to lower the cost at basis if you have to pay capital gains tax. However, if the apartment was your primary residence for 2 out of the last 5 years you are entitled to a $250,000 profit (if single) or $500,000 (if married) profit without paying cap gains tax.

Flip taxes vary in different buildings. I am not qualified to give tax advice. You should check with an attorney, accountant, tax adviser or IRS publication 523 "Selling your Home" http://www.irs.gov/publications/p523/index.html

 

Mar 01, 2008 08:55 AM #18
Anonymous
Anonymous
Anita

Can a coop board impose a flip tax on the seller of the unit while the sale is taking place. Meaning a buyer was found, and approved by the board, but the sale has not closed.

 

 

Feb 15, 2010 09:24 AM #19
Rainmaker
511,012
Mitchell J Hall
The Corcoran Group - Manhattan, NY
Lic Associate RE Broker - Manhattan, NYC

Hi Anita,

I don't know since I don't know the specifics and I am not an attorney. Your attorney should contact the coop's attorney or managing agent. If a flip tax is imposed it will also effect the buyer when they sell. If a flip tax has been voted by the shareholders, I believe they would need an amendment to the offering plan to change the proprietary lease. I think there needs to be a commencement date and the terms of the flip tax being imposed.

Feb 16, 2010 10:58 AM #20
Anonymous
Anonymous
Phil Haderer

I will have to pay 40% of the net profit upon sale of the coop. It's criminal. The policy has not changed in 18 years. Does the shareholder have any recourse?

Apr 09, 2010 04:04 PM #21
Rainmaker
511,012
Mitchell J Hall
The Corcoran Group - Manhattan, NY
Lic Associate RE Broker - Manhattan, NYC

Why did you buy in a coop with a 40% flip tax?  A majority of shareholders can vote to change a policy. It usually takes a quorum (some buildings 51% , some 75% or 2/3rd) it is stated in the offering plan and proprietary lease.

The only coops that I know of that have 30-40% flip tax are HDFC or Mitchell Lama. They are limited equity coops. They are "affordable housing" The buyer pays below market price and a low maintenance because the property is being subsidized by the city.

Apr 09, 2010 07:05 PM #22
Anonymous
Anonymous
Joe

I live in an HDFC Co-op. Been here 3 years and the area and place is just not for me anymore. I wan to sell.

The Co-op board recently raised the flip tax from 10% of the sale price to 25% of the sale price. 

With out a shareholders vote or anything. 

They just slipped a note under the door saying they decided to do that.

Is that legal? Doesn't there need to be a vote?

They also recently raised the fee to sublet by a lot, making it very hard to sublet and break even. So at the moment I'm feeling trapped. Damned if you do damned if you don't. 

 

Sep 03, 2010 12:21 AM #23
Rainmaker
511,012
Mitchell J Hall
The Corcoran Group - Manhattan, NY
Lic Associate RE Broker - Manhattan, NYC

Hi Joe,

It depends what is in the coop proprietary lease and by/laws. Usually a shareholder majority is needed to impose a flip tax. However your building is HDFC and already had a flip tax so depending on the language in the proprietary lease and by laws they may be allowed to change the amount without shareholder approval.

Read the coop documents: proprietary lease, by laws and the offering plan to find out if the board can raise the flip tax without shareholder approval. Board members are not necessarily attorneys or real estate professionals. There is no specific training to become a board member.

The shareholders have recourse if the board or any member is violating the by laws. It is usually spelled out how much discretionary power the board has. Board members have a fiduciary duty to the shareholders. The coop must need the revenue.

Good luck. Let me know if you need help selling.

Sep 03, 2010 10:08 AM #24
Anonymous
Anonymous
Erik

Mitchell, 

My wife and I (young couple) are considering buying a Manhattan HDFC (west harlem) 1BR for 120k. We qualify to buy it now, based on our income, but won't qualify in less than 2 years because we will have higher income. Anyway, the co-op has a 70/30 flip tax (30% of profit from sale to go to building) when you sell the unit. monthly fees are really low.

We know that we will be here for at least the next 7 years. To say that we will still be here in the area after that is too speculative (we want to stay, but how do we know? it based on jobs). We could sell the unit or hang on, but the building laws say this flip tax is in affect for the next 20 years.

We see this place as a place to "live," not invest. We could "live" in many other places in the city by paying higher monthly rent. But we do qualify. Should we be worrying about the flip tax or just accept it? I can't get a straight answer of the negative or positive about this flip tax.

Thank you,

Erik

 

 

 

May 10, 2011 11:15 PM #25
Rainmaker
511,012
Mitchell J Hall
The Corcoran Group - Manhattan, NY
Lic Associate RE Broker - Manhattan, NYC

Hi Erik,

Since I wrote this post five years ago, I have sold many coops with flip taxes including HDFC coops. I'm no longer opposed to them particularly in HDFC coops. In an HDFC coop you are buying the apartment at a below market price with low maintenance that includes reduced taxes. In return, when you sell within 20 years you give back a portion of your profit ("limited equity") back to to the coop. The coop uses that money for repairs and improvements to the building.

Keep in mind the 70/30 is on the net profit not the sale price. You should be able to deduct any capital improvements or renovations. So if you sell it for $220,000 you pay the coop 30% of $100,000 less any renovation costs. If you spent $75,000 in renovations than you would pay 30% of $25,000 or $7500. It really is a good deal even better if you stay 20 years. You get affordable housing plus 70% of the equity when you sell.

I hope you're working with an experienced buyer's agent. The listing agent represents the seller's interests. They are required to have you sign an agency disclosure form that acknowledges they represent the seller and in NY state buyers are entitled to have their own agent representing their interests. The seller pays the broker fee.

Feel free to call me at (917) 312-0924 if you have any questions or if you would like to have an agent represent your interests in the transaction.

Best,

Mitchell

 

May 11, 2011 12:33 AM #26
Anonymous
Anonymous
Erik

Dear Mitchell,

Thank you for reply. True, It may be a 5 year-old post but it's the first thing that pops up in a targeted and informative Google search, so it is does help.

 I clarified with the seller on these points; their response was a little different. I want to provide it here in-case others are curious when they have questions, too.  Seller's response:

"The Flip tax is in place for a period of 30 years (until 2036)  I do not believe individual apartment renovations play into the flip tax.  The definition of 'Profits' as defined in Article XV, Sect 2 our Prop lease: "Resale Profits" shall mean (i) the gross sales for such sale, less (ii) the sum of the consideration paid by such shareholder when purchasing the unit plus special assessments for building wide improvements.
So, (Resale price) - (original purchase price + Building Wide Assessments)= PROFIT
Your example, (220,000) - (120,000 + special assessments charged to individual shareholders for building improvements)= 100,000
The costs of building wide improvements or capital improvement such as new roof, boiler, etc are sometimes passed down to the shareholders.  Since our finances are good we have absorbed all such costs."

So, in this case we're still getting affordable housing plus a small return on equity that is still substantial, right?
What do these types of co-ops do  after the flip-tax expires ( in this case, what happens after 2036)?

We stumbled upon this HDFC without a broker and the co-op board is the seller; thus, no buying agents have been involved, just lawyers. Can a buying agent help at this point?

May 13, 2011 02:14 PM #27
Rainmaker
511,012
Mitchell J Hall
The Corcoran Group - Manhattan, NY
Lic Associate RE Broker - Manhattan, NYC

Hi Erik,

I love Google!

Every HDFC coop is different. There are good ones and bad ones. Ones that are run well and ones that aren't. Board members don't necessarily have to have any special training, skills or real estate knowledge in order to become a board member.

$120,000 is obviously a good price for a Manhattan apartment. Your lawyer needs to do "due diligence". Usually the longer the HDFC coop has been established the better it is for a purchaser because they have a track record. This coop may have recently been established.

30% of the gross profit is not that unusual for a newer HDFC coops. Hopefully they already renovated the apartment before selling it to you. HDFC coops that have a flip tax based on net profit rather than gross profit encourage shareholders to renovate, upgrade and increase the value of the apartment.

If the apartment needs work in order to be livable and you have to invest in it, in my opinion then it is not in your best interest that the coop shares in that portion of the profit since they had nothing to do with it. In my opinion it should be in move-in-condition before purchasing in a coop with a 30% flip tax on gross profit.

It is possible that there have not been any resales in this coop yet therefore they may need to impose assessments for repairs. But they are saying their finances are good so they have absorbed these costs. Good finances are important.

Most HDFC coops were set up in 70's and 80's when landlords abandoned buildings, the city took over the buildings and then sold the building back to the tenants for practically nothing. When those original insider shareholders sell is when the coop really benefits from the flip tax.

Not all HDFC coops currently have flip taxes. The more "restrictive covenants" the harder it will be to sell. Some HDFC coops can not obtain financing through banks.

The bottom line is you like the apartment. It is affordable, you will be able to live there and keep 70% of your equity when you sell. In my opinion it should be in move-in-condition. Your lawyer should advise you of the pros and cons and of any obstacles and challenges you may have selling it.

After 2036 anything can happen. They will either have a huge reserve fund from collecting the "flip tax" from resales or they may choose to continue the flip tax or choose to no longer be an HDFC coop. However, a majority of shareholder votes is usually required to make changes to the Prop lease.

Good luck!

 

May 14, 2011 09:11 AM #28
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Rainmaker
511,012

Mitchell J Hall

Lic Associate RE Broker - Manhattan, NYC
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