Flip Taxes: Co-Op & Condo Boards' Tool for Boosting Reserve Funds

It began back in the 1970s as a tool to discourage real estate speculators and to avoid assessments and increases in monthly charges. Today it is primarily a tool for co-op and condo boards to keep their reserve funds robust. And when it comes to setting one — and determining who pays it — there's a lot of wiggle room.

It is the so-called flip tax, or more accurately the transfer fee, a percentage of the sale price that's paid by an apartment seller or buyer (or both) into the building's coffers. Most boards impose a flip tax or transfer fee of about 1% to 2% of the sales price, according to experts convened by Brick Underground. But the number depends on many factors, including the neighborhood, the building's affordability and the depth of residents' pockets, to name a few.

“It does vary according to each building’s needs,” says Deanna Kory, a broker at Corcoran. “On Central Park West and Park and Fifth avenues, it can range up to 3.5%.” At HDFC co-ops, flip taxes can mushroom to 10% or even higher, a tool designed to keep the units affordable.

Flip taxes tend to be more common in co-ops, but newer condos have added transfer fees to raise more money for building reserves. “It used to be something that you really didn't even think about in condos,” says Adam Stone, founding partner at the Stone Law Firm. “But there are more and more passing because every building thinks: ‘Why not have an extra way to raise money?’”

And given today's economic climate, every board is looking for extra money. The sluggish real estate market has put a pinch on income from flip taxes even as boards are faced with a seemingly endless array of rising expenses, from property taxes and labor costs to the cost of materials and the looming cost of retrofits that will bring buildings into compliance with carbon emission caps imposed by the city's sweeping Climate Mobilization Act.

In such a climate, a flip tax becomes even more valuable for boards. And in buildings where the seller pays, there's a way to make the flip tax appear to disappear.

“You can view the flip tax as part of the purchase price," says Dolly Hertz, a broker at Engel and Volkers. "In this softer market, sellers are accepting lower offers in general, which makes the flip tax lower and reduces the overall package price to the purchaser. It basically folds into the overall final number at closing."

The fact that flip taxes can obviate the need for assessments or increases in monthly fees does not mean they're universally loved.

"One thing is certain," Hertz says. "The flip tax never fails to be a bone of contention.”