Uniformed Audit Committee Guidlines
TG 2001-01: | Sales of Improved Property by a Speculative Builder |
Issue:
This guideline provides direction to persons who construct improvements to real property and then sellthe property, whether they perform the work themselves or hire someone to construct the improvements.
Applicable Law:
The Model City Tax Code (MCTC) in Section 416 provides that someone who has constructed improvements upon real property, and who then sells or offers to sell the improved property is subject to Privilege Tax as a Speculative Builder in the city where the real property is located. The Code also provides for a deduction of 35% of the gross income and tax credits for taxes already paid.
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Section 416(a)(2) defines Improved Real Property as "…any real property:
(A) upon which a structure has been constructed; or
(B) where improvements have been made to land containing no structure (such as paving
or landscaping); or
(C) which has been reconstructed as provided by Regulation;
(D) where water, power, and streets have been constructed to the property line."
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The following definitions in Section 100 state:
Owner-Builder means an owner or lessor of real property who, by himself or by or through others, constructs or has constructed or reconstructs or has reconstructed any improvement to real property.
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Speculative Builder means either:
(1) An owner-builder who sells or contracts to sell, at anytime, improved real property (as provided in Section 416) consisting of:
(A) Custom, model, or inventory homes, regardless of the stage of completion of such homes; or
(B) Improved residential or commercial lots without a structure; or
(2) An owner-builder who sells or contracts to sell improved real property, other than improved real property specified in Subsection (1) above:
(A) Prior to completion; or
(B) Before the expiration of twenty-four (24) months after the improvements of the real property sold are substantially complete.
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Substantially Complete means the construction contracting or reconstruction contracting:(1) Has passed final inspection or its equivalent; or
(2) Certificate of occupancy or its equivalent has been issued; or
(3) Is ready for immediate occupancy or use.
Discussion:
According to Section 416, a property owner does not have to directly supervise, perform, or coordinate the construction of the project for the sale of the improved property to be subject to the tax. Even though a construction contractor may have been employed to actually construct the improvements, the owner is liable for the tax imposed from the sale of the property.
A property owner who is constructing improvements with the intent of selling the property as a Speculative Builder may claim an exemption from city tax on purchases of both direct materials incorporated into the improvement and for the construction which is performed by construction contractors on the project. To do so, the Speculative Builder must provide the material suppliers and construction contractors with a written declaration, along with his City Privilege Tax license number, that he is improving the property for the purpose of sale for which he assumes the liability for payment of City Privilege Taxes.
If an Owner-Builderdid not provide a declaration of exemption at the time of the material purchase or for work performed by construction contractors, the builder is allowed a tax credit for city taxes paid or charged separately. These credits must be documented to the satisfaction of the Tax Collector.
Most cities do not provide for an exemption for land. However, MCTC Local Option M allows for an exclusion of the purchase "cost of land," and Local Option N allows for an exclusion of the "fair market value of land." Please refer to the MCTC Section 416(b)(2) and the Local Options Chart at ModelCityTaxCode.az.gov or the appropriate jurisdiction before using this exemption.
Arizona cities impose a Privilege Tax on the gross income from the sale of improved real property, if the property is sold within specified periods of time following substantial completion, regardless of whether the owner has used or leased the property. According to Section 416(a)(3), a sale includes a binding contract for sale or leases for a term of thirty (30) years or more (all options for renewal are considered part of the term).
Reference Chart
Type of Improvement |
Taxability of Sale |
Residential or commercial lots with offsite improvements constructed |
Taxable if criteria for Section 416(a)(2) met. |
Commercial/industrial and multifamily residential real property |
Taxable if a contract for sale is entered into or is sold prior to completion or before expiration of 24 months after substantial completion. |
Custom, model, or inventory homes |
Taxable when sold without time restriction. |
1. City Tax Computation
on Speculative Builder Sale of
Improved Property - No Land Deduction
Gross Income From Sale
Less: | State and County Tax Paid (To contractors constructing improvements on property, if exemption not claimed by owner) |
Equals: | Calculation Base for Factored Tax |
Less: | Factored Tax (Calculation Base times Tax Factor) (See Note B) |
Equals: | Calculation Base for Standard 35% Deduction |
Less: | Standard Deduction (Calculation Base times 35%) |
Equals: | Net Taxable
Speculative Builder Income City Tax Due on Sale (Net Taxable Speculative Builder Income times City Tax Rate) |
Less: | City Tax Credits (Total of City Tax Paid, either directly or to contractors retained to construct the improvements on the property, and upon materials incorporated into the improvement) |
Equals: | Net City Tax Due |
2. City Tax Computation
On Speculative Builder Sale of
Improved Property - Land Deduction
Gross Income From Sale
Less: | Land Deduction (See Note A) |
Less: | State and County Tax Paid (To contractors constructing improvements on property, if exemption not claimed by owner) |
Equals: | Calculation Base for Factored Tax |
Less: | Factored Tax (Calculation Base times Tax Factor) (See Note B) |
Equals: | Calculation Base for Standard 35% Deduction |
Less: | Standard Deduction (Calculation Base times 35%) |
Equals: | Net Taxable
Speculative Builder Income City Tax Due on Sale (Net Taxable Speculative Builder Income times City Tax Rate) |
Less: | City Tax Credits (Total of City Tax Paid, either directly or to contractors retained to construct the improvements on the property, and upon materials incorporated into the improvement) |
Equals: | Net City Tax Due |
Note A: For cities with Local Option M, use the purchase cost of land. For cities using local option N use the fair market value of the land. Caution is recommended, and the city in which the project is located must be consulted to determine whether a land deduction is available.
Note B: Factored tax calculation is dependent upon a number of variables, i.e., whether the transaction is taxable by state, county, and city, or city only; and whether a land deduction is provided by that city. The taxing jurisdictions involved must be contacted to provide appropriate formulas.
Examples:
Improvement to real property and the sale of the property within specific time-periods subjects the gross income from the sale to city tax, even though a person or firm may not designate himself as a developer or speculative builder.
The purpose of this guideline is not to provide an exhaustive list of transactions that are subject to the city tax on Speculative Builders, but rather is to be illustrative of the underlying tenets.
Generally, an owner should contact the jurisdiction in which the project is located to determine how a given transaction may be subject to taxation. The Arizona Department of Revenue should be contacted for specific information regarding State Privilege Tax Statutes.
Explanatory Notice: The purpose of a guideline is to promote a better understanding of the Model City Tax Code for the general public. A tax guideline may also provide interpretation, details or supplementary information concerning the application of the law. Relevant statute, rulings, or case law, as well as a subsequent guideline or ruling may modify or negate anyor all of the provision of any tax guideline. If the information containedin a tax guideline is found to be erroneous, and a taxpayer shows reasonablereliance on that information, the taxpayer will be liable for any tax or interest that may result from the erroneous advice, but no penalties will be imposed.