Purchasing and Selling Co-Operatives. What the Flip (tax)?
February 13, 2016
Sometimes it's paid by the seller, other times it's paid by the buyer, but if you've never bought a co-operative apartment, then you may be wondering, what the flip is a flip tax anyway?
Fortunately, this one isn't too complicated. In short, a flip tax is a payment that's made by a co-operative owner or purchaser at the time that an apartment is transferred between parties. Most often, the amount is no greater than 2% of the purchase price.
At the outset, defining and explaining the purpose of a flip tax is impossible without establishing a few of the basics of the co-operative form of ownership.
When purchasing a co-operative apartment, or more commonly, a co-op, you're not purchasing real property; but instead, are purchasing a certain number of shares in a corporation, and along with those shares –– via a proprietary lease, the right to occupy a certain apartment within the building owned by the corporation.
Depending on the apartment's size and location within the building (amongst other factors), you'll receive a number of shares in the corporation that: “bears a reasonable relationship to the value that the apartment corresponds with as to the entire building/corporation."
As a shareholder, perhaps your most important responsibility is that you pay a monthly cost that goes toward the up-keep and maintenance of the building. This is conveniently known as a monthly-maintenance fee, or simply, maintenance.
Provided that the building has shareholders that make their maintenance payments in a timely and consistent fashion, collectively, the building will have plenty of capital in reserve for any necessary updates or repairs that may arise.
So what does all of this have to do with a flip tax? The short answer is quite a bit. As all shareholders (apartment owners) have an interest in keeping their monthly carrying costs low, a flip tax serves as an avenue for co-operatives to keep their monthly carrying costs low, while also generating an alternative source of increase for their reserve fund.
For instance, let's assume that an apartment is listed at $750,000. Using this number, once this apartment is transferred from the owner and to the purchaser, then $15,000 (2% of $750,000) would be paid to the co-operative. As a result, from dividing $15,000 by 12, then the monthly carrying costs for each of the shareholders, collectively, would be reduced by $1,250/mo.
Of course, the actual monthly saving per shareholder would depend upon the number of apartments in the building, as well as the individual owner's number of corresponding shares.
Lastly, from the buyer's prospective, whether the flip tax is paid by the seller or by the purchaser can, at times, make purchasing in one building more appealing than in another.
As you may have guessed, these are only the basics. Moreover, some co-operatives may allow the parties to use the flip tax as a negotiating tool, with the seller or buyer exchanging their payment of the flip tax for another bargaining chip connected to the deal.
We hope this helps clear things up a bit. As always, feel free to reach out if you have any questions regarding the process of purchasing or selling an apartment here in the City.