When finances get tight—the last recession period comes to mind—boards and managing agents often look for ways to increase revenues or decrease expenditures. In some cases, the answer is a flip tax, a “transfer fee” that is paid to the co-op or condo association by owners who sell their units.
“Flip taxes are extremely beneficial as an ongoing funding source for building reserves and capital improvements,” says Richard Montanye, CPA and partner with the Uniondale-based tax and business consulting firm, Marin & Montanye, LLP. “Buildings that have flip taxes generally have fewer assessments and perhaps may have lower debt levels as a result of this additional funding source.”
A flip tax, or transfer fee, is not a new business practice in New York. The former name is somewhat misleading as a “flip tax” is not a tax nor it is deductible as a property tax. Rather, it is a transfer fee payable upon the sale of an apartment by either the buyer or the seller back to a co-op or condo.
In most cases, flip taxes are considered a method to help raise money for a building’s overhead expenses without raising maintenance fees. Norman Prisand, CPA and partner with the Plainview-based accounting firm of Prisand, Mellina, Unterlack & Co., LLP, explains that there are numerous types of flip taxes. These include a flat tax fee, a tax fee based on shares allocated to the tenant’s apartment, a tax/percentage based on the sales price of the unit and a percentage based on the net profit of the sale. “We have seen all these different formulas,” says Prisand.
Attorney Eric Goidel, senior partner with the New York-based law firm of Borah, Goldstein, Altschuler, Nahins & Goidel, P.C. further explains the pros and cons of the three leading flip tax formulas. With a fixed dollar amount of the common interest, he says the amount could quickly erode due to inflationary pressures. As a result, he advises that a mechanism be established so the fixed dollar amount is tied to inflationary changes.