Foreclosure Cash

Firstly, let me clarify that a flip tax (also known as transfer tax) in real estate investing is not a tax that is levied by the government for the purpose of raising revenue. A flip tax is basically a revenue generating mechanism for a private land authority.

In the early 1980’s many rental buildings started becoming co-operative societies or were transformed into condominiums. During this time, owners started selling their apartments at much higher rates than what they had bought them for. Associations felt that these owners should give a little back to the building that helped them make the profit, and so the association began to charge the flip tax as a way to generate income. Since then, the flip tax has become common on all properties that are undergoing a transfer of ownership.

Who pays the tax?

There are no set rules about who has to pay the flip tax. Depending on the state of the real estate market at the time of the sale, the payer can either be the owner of the co-operative society or condo or the buyer. If the market is dominated by sellers and the buyers are competing against others for the property, then the seller will usually pass the burden of paying the flip tax onto the buyer. However, if it is a buyers market and the seller is finding it difficult to get a reasonable offer on the property, then the seller will usually agree to pay the flip tax in order to attract prospective buyers.

Computing the flip tax

Flip tax varies extensively from building to building. The general formula for calculating the fee is usually found in the building’s by-laws. However, fee based on the percentage of the sale price is starting to become more common nowadays. Some buildings have also come up with more intricate transfer fee structures based on the length of time that the owner has held the apartment.

Whether you are new to real estate investing, or you are an experienced investor in flipping real estate, knowing the nuances of the business will always prove beneficial.