A flip tax is something of misnomer in that it is not a tax at all; at least not in the traditional sense of a levy imposed by a governmental or quasi-governmental entity for purpose of raising revenue. On the other hand, a flip tax is a revenue generating mechanism for a private land authority as it is basically a fee the co-op association or condominium association places the transfer of ownership of a condo or co-op unit. The fee can take many forms. It may be a percentage of the gross or net sale, a percentage of the profit made from the sale, a fixed amount that is pre-determined by the association or some other form.
The practice of charging a flip tax dates back only to the early 1980’s when many large rental buildings began going co-op or were being converted to condominiums. When tenants started to sell their apartments at much higher rates than what they’d bought them for, associations began to charge the flip tax as a way to generate revenue to make needed repairs on the buildings that were being converted. They reasoned that the owners who were making a huge profit on their sale should give a little back to the building that helped them make the profit.
Originally, flip taxes were only imposed when a building was being converted. Associations soon realized that these flip taxes could generate an ongoing income for the associations. Soon it became commonplace for associations to excise a flip tax on all properties that were undergoing a transfer of ownership whether the building was in need of repairs or not.
There are no hard and fast rules about who has to pay the flip tax – the owner of the co-op or condo or the new buyer. Some associations have their own rules and require the seller to pay the flip tax. If there is no association rule, market conditions will usually determine who will pay the tax. If it is a seller’s market and the new buyers are competing against others for the property, the homeowners can usually require the buyer to pay the tax. The buyer usually will pay the flip tax in order to get the property. However, if it’s a buyers market and the seller is having trouble getting an offer on the property, the seller may offer to pay the flip tax as an incentive for prospective buyers.
Not all co-ops or condominiums impose a flip tax on the sale of a property, and the practice of imposing one is often an issue of debate, but they are legal and often a necessary fee if you want to sell your co-op or condominium.