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Reprinted with ADOR permission

The speculative builder tax is imposed by Arizona cities and towns on the sale of improved real property by a speculative builder. Tax returns and payments are due by the 20th day of the month following the close of escrow or transfer of title.

The speculative builder is the real property owner who improves real property himself, or contracts through others, to improve real property. A speculative builder sells, or contracts to sell improved real property:

  1. Comprising of: (1) a custom (see family residence exception below), model, or inventory home, regardless of stage of completion; or (2) improved residential or commercial lots without a structure (e.g., utility stub outs, offsites, paving or landscaping have been completed); or (3) where water, power and streets have been constructed to the property line at any time (i.e., there is no time limit); or
  2. Any other property prior to completion or prior to the expiration of 24 months after substantial completion (e.g., commercial).  Substantial completion means that the property has passed final inspection, or has a certificate of occupancy, or is ready for immediate occupancy or use.

The sale of property which has been reconstructed is also subject to the speculative builder tax.  Please refer to the MCTC  Reg. § -416.2 for more information on reconstruction.

The sale of unimproved real property is not subject to the speculative builder tax.

Family Residence Exception

The sale of a custom home will be treated as the seller’s family residence and not subject to the speculative builder tax when:

  1. the property was used by the immediate family of the seller as the family residence, or vacation residence, for 6 months prior to the offer for sale; and
  2. where the seller has not sold more than two such residences within 36 months prior to the sale; and

the seller has not licensed, leased, or rented the residence for any period within 24 months prior to the offer for sale.

Sale of Real Property

A sale includes any transfer of title or equitable ownership in the improved real property.  The signing of a capital lease (i.e., a lease with a bargain purchase) on improved real property for a term of 30 years or more (including the original term and all renewal options) is deemed a sale subject to speculative builder tax.  For reconstruction contracting, the date of sale of the improved real property is the execution date of the sales contract to sell the improved reconstructed real property.

The tax base for speculative builder tax is the gross income derived from the sale of improved property (described above) within a city or town’s boundaries.  Speculative builders may be entitled to exemptions, deductions, and a city tax credit. See MCTC § 416(c).

The speculative builder tax accrues at the time of close of escrow, or transfer of tile.  It is calculated on the total selling price which will include realtor fees, title transfer fees, etc.  This tax must be reported the month following the close of escrow or transfer of title.

Deductions & City Credits

Common speculative builder deductions and their codes, include:

Fair market value of land (only allowed by those cities and towns which adopted Local Option # N)734
State/County Tax Paid by Contractor802
Cost of Architectural or Engineering Service557
Development Fees560
In Place Lease Values801
Factored Tax Deduction (see example below on how to calculate)551

After removing from gross all allowed deductions, the standard 35% deduction should be applied to the net amount.

35% Deduction Allowed502

After applying all deductions and calculating the speculative builder tax due, a city tax credit may be applied against the city tax due.  The credit is equal to the amount paid in city privilege tax or use tax, or the equivalent excise tax paid directly to a taxing jurisdiction by the speculative builder. This would include city privilege tax paid to the contractors (or directly to the Department if the speculative builder provided a Form 5005) on the construction of the project, or city privilege tax paid to a vendor for materials purchased by a speculative builder which are incorporated into the real property.  A credit may also be taken on any amount of city use tax paid on materials incorporated into the project.

Please refer to the MCTC § -416 for speculative builder statute for the full list of deductions.

Additional questions should be referred to AskTaxPolicy@azdor.gov.

Example

Computing the Speculative Builder Tax

Owner-Builder

The owner-builder tax is imposed by Arizona cities and towns on an owner-builder who is not a speculative builder (i.e., the property has not sold after 24 months).  Any TPT licensed person who provides a contractor with a Form 5005 and who purchased materials tax exempt by providing a Form 5000 to a vendor, is liable for city owner-builder privilege tax at the end of 24 months.  State/county has no owner-builder class however, applicable taxes must be remitted when due to the state/county as required under the retail and prime contracting classifications.  The city owner-builder privilege tax is imposed based on a percentage equal to:

  1. The amount of tax that should have been paid for prime contracting TPT purposes (65% of the amount paid to the contractor at tax rate sourced to the job location); and
  2. The amount of tax that should have been paid to the retailer for the materials purchased tax exempt by the owner-builder.

Please refer to the MCTC § -417 for the owner-builder statute and the full list of deductions.

Additional questions should be referred to AskTaxPolicy@azdor.gov.