Per Share Amount. This is, of course, the most conventional and simplest type of flip tax, and one found acceptable by the Court in the FeBland case. It treats all shareholders equally by imposing a flip tax of a fixed dollar amount per share. However, this method can excessively benefit sellers who bought years ago and paid far less than the current market rate, because they would be taxed the same amount as those who bought more recently at higher prices.
Flat Fee. A second method is to charge a certain flat dollar amount per transaction (e.g., $5,000 per transfer). This method benefits the owners of larger units who pay the same amount as the seller of a studio. It can, however, be the best compromise for a building where all the apartments are relatively similar in size. This form of flip tax, if properly enacted, is also perfectly legal under the amended Section 501(c) of the Business Corporation Law.
Percentage of Sales Price. Another acceptable form of flip tax is a percentage of the gross sale price.
Percentage o f Net Profit. Perhaps the most controversial form of flip tax is one based on net profit. In this case, the cooperative must very carefully define exactly what its formula will be for determining the net profit; and the formula must be strictly and consistently applied. If your formula allows the seller to subtract from the sales price provision for improvements made to the apartment, there will be an incentive to pad costs in order to lower the net profit figure that will form the basis for the flip tax. Evidence of payment of invoices for improvements should be required.
Some boards calculate the flip tax as a dollar amount per share or a percentage of the net profit or sales price.
Generally, boards with flip taxes use the funds to increase the co-op's reserve fund which, of course, aids the financial condition of the corporation.
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Yes, the concept was created by co-op boards to discourage short time owners from selling quickly. What ever the amount is, either a pecentage of the sale price, flat fee or based on the amount of shares, this money goes into the co-ops reserve fund.
Many (almost all) co-ops in Manhattan impose this "flip tax." There is no time limit either. If it's there, it's just there.
Consider this. If this is a first time purchase for you, it's a great time to buy. You've got depressed prices, historic low interest rates and a Federal tax credit to claim. Indeed, the perfect storm for buyers. Given the statistics that a first time buyer will live in their apartment for 5-7 years before selling, you're well positioned to see very good market appreciation by the time you sell.
Don't sweat this "flip tax." Go for it and then sit back and enjoy!
Joseph C. Hastings
Prudential Douglas Elliman Real Estate.
You're right historically about how flip taxes came about, but of course, once management finds an income stream, it also tends to find a way to keep the money coming!
The usual justification for flip taxes these days is to bolster the building's reserves. These are funds set aside for big emergencies or improvement projects. By having reserves, a building can avoid charging assessments for these things.
One more thing to note: Many buildings do not impose a flip tax if you sell and buy within the same building.
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You are correct. 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 increased costs and expenses many buildings have since imposed flip taxes. There are several ways a flip tax can be imposed.. In most coops it usually requires 2/3 of the shareholders to vote for it. It can be a percentage of the sale price or a flat fee or a dollar amount per share. Some buildings have grandfathered in long time shareholders. The argument for flip taxes is that it helps prevent constant maintenance increases.
Some buildings have flip tax and some don't. It has nothing to do with the length of time you owned.
The co-op board or management will know if a certain co-op impose a flip tax.
It is pretty common in the NY area.