Is Your Co-op's Flip Tax Legal?

Dating back to the 1970s, the flip tax — also known as a transfer fee — has been a popular and relatively painless way for New York City co-op boards to replenish their reserve funds while avoiding assessments and maintenance hikes. By requiring apartment sellers to cough up a portion of the sale price, usually from 1% to 3%, the flip tax has become a vital source of financial stability for co-ops.

The practice was challenged in the courts in the 1980s, resulting in a ruling that co-op boards could impose a flip tax only if one were authorized in the original offering plan or had been permitted through an amendment to the proprietary lease. Furthermore, the courts ruled, all flip taxes had to be imposed equally. Today, four decades later, flip taxes are still a source of contention.

At an Upper Manhattan co-op, for instance, an apartment seller was recently surprised to learn he would have to pay a 2% flip tax. When he'd bought the apartment in 2013, the seller paid a flip tax of $20 per share — a much smaller sum. When asked for evidence that it has the right to impose the flip tax, the co-op board offered documents that made no mention of a flip tax. Is this flip tax legal? Can the apartment seller fight it?

If the terms of the flip tax changed at some point, shareholders should have received written notice of a shareholder vote to authorize that change, says the Ask Real Estate column in The New York Times. Based on that 1980s court ruling, amendments to the flip tax cannot be made unilaterally by a co-op board.

“Unless the language of the proprietary lease gives the board the discretion to raise the flip tax from time to time, which is atypical, the flip tax can be increased only through an amendment of the proprietary lease, which generally requires the approval of tenant-shareholders owning two-thirds of the co-op’s shares,” says Scott Greenspun, principal at the law firm Braverman Greenspun. (In some buildings, this so-called "super-majority" is even higher.)

If you can’t recall such a vote, look in your governing documents, including your proprietary lease and your bylaws, for language authorizing the change. The terms are usually included in a section of the lease that contains rules governing how shares can be sold. If the tax isn’t expressly permitted in the lease, the board cannot prevent you from selling your shares if you don’t pay it, Greenspun says.

Co-op shareholders who have faced improperly implemented flip taxes have been successful in court. “You may have grounds to challenge its validity in court after closing,” says Ruta Behrend, a partner at the law firm Tane, Waterman & Wurtzel.

You could seek a refund of the flip tax if it wasn’t legitimately adopted, Behrend adds, and your lease may also allow you to recoup the legal fees you incur if you are successful in challenging the flip tax in court.

It's yet another reminder that while a co-op board's powers are prodigious, they are not without limits.