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

Owner-Builder and Speculative Builder Examples

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
www.modelcitytaxcode.org/forms/speculative_builder.htm