Owner-Builders and Speculative Builders


Who is an Owner-Builder?
An owner or lessor who has improvements constructed on real property is an owner-builder whether he does the work himself or hires others to do the construction.

Are Owner-Builders Taxed?
Owner-builders may or may not be liable for tax.  Generally, owner-builders who sell property or who claim exemptions from tax during construction may be liable for tax in addition to tax paid by their contractors.  Owner-builders should be aware of the circumstances that will result in a tax liability.

Owners Building Improvements for Their Own Use
Owner-builders who are building improvements for their own use are not normally the parties liable for the tax on construction contracting.  Each of the contractors and suppliers who provide materials and/or services would be liable based on their income from the job.  Such owner-builders should not claim a tax exemption from their contractors or suppliers.

Owner Builders Who Are Speculative Builders
A speculative builder is an owner-builder who sells or contracts to sell improved real property:

  • Prior to completion of construction, or
  • Within 24 months after substantial completion of construction, or
  • At any time for custom, model, or inventory homes, or
  • At any time for improved residential or commercial lots without a structure
  • Owner-builders who are constructing improvements for sale may obtain a city transaction privilege tax license and claim a tax exemption from their contractors and suppliers.  If the owner-builder does not claim an exemption, he may claim a credit for city taxes that have been paid to his contractors and suppliers.
  • An owner-builder who does not sell a property within the applicable 24 month period would owe tax in the 25th month based on the total cost of construction, less a credit for city taxes previously paid to suppliers and contractors.

 

Sale of a Personal Residence
A homeowner may be exempt from the speculative builder tax if they sell a residence they lived in for the six months prior to the offer for sale.  This exemption is subject to some limitations including:
The seller cannot have sold more than 2 such residences in the past 3 years.
The property cannot have been rented in the past 2 years.

Tax Rate on Speculative Builders
The Mesa tax rate is 1.75% of the taxable income.  (Note: The Mesa City Tax rate increased to 1.75% effective 07/01/2006)

Income and Deductions
The gross income is the full sales price of the property at the time of close of escrow or transfer of title.
Taxpayers are allowed to deduct state, county, and city transaction privilege taxes paid.
Taxpayers are also allowed to standard 35% deduction.  This 35% deduction should be computed after the transaction privilege tax deduction has been subtracted.

Credits
The speculative builder tax supplements the tax on construction contracting.  The taxpayer is entitled to a credit for the city tax that has already been paid by contractors, suppliers, and developers during the construction.
Owner should retain records of the tax they paid during construction in order to document their credit.  They should keep copies of invoices showing that they were charged tax.  Many of their contractors may not show the tax as a separate charge on their invoices.  Owners should obtain statements from their contractors stating the amount of tax they paid on their income from the project.

Reporting Your Tax Liability
Speculative builders with a Mesa tax license may report their activity on the same tax return that they report other business activities.  Those with one-time liabilities or who wish assistance in computing their liabilities may call Tax & Licensing at (480) 644-2316.

Examples:

  • An investor buys a commercial lot an hires a contractor to build a shopping center on it.  He enters into a contract to sell the shopping center 23 months after completion of  construction and closes on the sale two months later.  He owes tax based on the full sales price less a credit for tax paid by the contractor and the lot developer.

  • The above investor does not contract to sell the property until the 25th month after completion.  He does not owe any speculative builder tax.

  • A homeowner buys a lot and hires various contractors to build a home on it.  He does not issue any exemption certificates to anyone.  He moves into the house and lives in it for 7 months after completion.  He then advertises the house for sale and sells it.  He does not owe any speculative builder tax.

  • A developer buys a piece of land and subdivides it into ten lots.  He has streets and utilities constructed to the lot lines.  He sells five lots to a construction company who provides him with an exemption certificate.  He sells one lot per year for five years to individuals to build homes.  The first five lots are exempt.  The construction company will pay tax on these later.  The remaining five lots are taxable regardless of how long after construction they are sold.

  • An owner hires a contractor to build a building.  The contractor does not charge tax on his invoices.  The owner sells the property within 24 months and computes the tax on the sale.  The owner would not be able to claim credit for tax paid by the contractor until he could provide evidence that the tax had been paid. 

 

City Rules Differ From State Rules
The Arizona Department of Revenue's laws do not contain the same provisions relating  to speculative builders.  Owner-builders should contact the Arizona Department of Revenue about the consequences of a sale for purposes of state and county taxes on construction contracting.
For additional information, see the Model City Tax Code Guideline TG 2001-01 at
http://modelcitytaxcode.az.gov/forms/speculative_builder.htm

 


 

 

Office Locations:
Licensing Office
55 N. Center St.
Mesa, AZ  85201
Phone: 480-644-2316
FAX: 480-644-3999

Tax Audit & Collections
20 E. Main St, Suite 450
Mesa, AZ 85201
Phone: 480-644-3816
FAX: 480-644-2687


Office Hours:

Monday - Thursday
7:00 a.m. to 6:00 p.m.
Closed Fridays

Mailing Address:
Tax & Licensing Office
P.O. Box 1466
Mesa, Arizona 85211-1466

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