Recently I have been hearing rumblings from other Phoenix area investors, that are pulling permits to add sqft or tearing down old properties and build new, about a Speculative Builder Sales Tax in many metro-Phoenix cities.
Has anyone dealt with this? I would like to know how you handled it. Any suggestions?
The speculative builders tax is part of the Arizona Department of Revenue’s Model City Tax Code, Article IV, Section 416. It is permitted in every Arizona city and applied after real property is improved. Improvements increase the value of a property, hence the term speculative. Generally, the tax ranges between two and three tenths of a percent of the gross selling price. The tax is applied in any situation where the following improvements are made to a property:
- Structural improvements such as adding a new room, deck, or other feature
- Non-structural improvements such as paving, resurfacing, or landscaping
- Reconstruction as required by regulatory changes
- Addition of water or power lines to the property
- Construction of a street leading to the property
Clearly, a homeowner need not engage in construction on their own property for the tax to apply. If the city decides to enhance public services to a property, it can tax the homeowners after-the-fact. Also, if a city decides certain changes must be made to properties to comply with new regulations, the tax may be charged.
Builders, real estate agents, and brokers are subject to the speculative builders tax if they own a property or enter into limited ownership arrangements wherein they share in the profits of a sale with the property owner. The tax is levied on owners.
Such professionals should also know the tax considerations in their cities so they may best serve their clients. For instance, if a seller is planning to renovate a property to get a better selling price, they should advise that the speculative builders tax will be applied. When the tax is applied and to whom depends on how soon local authorities become aware of a sale. The tax may be applied before the work is complete or up to 24 months after a sale.
If applied during construction, this may hinder progress because funding may suddenly become an issue between the contractor, owner and a buyer of the project. So, it is in the interest of all involved in a project to know of the tax before problems arise.
Although the speculative builders tax is somewhat hidden, it is hidden in plain sight. Here's where you can find out if Phoenix, Scottsdale, or any of the surrounding areas have it. The official website of the state of Arizona has several pages of information related to the tax, which may be found at the following addresses:
Finally, for those wanting to know specific information related to their city, town, or municipality, the state has provided a chart showing how each location applies the Model City Tax Code including speculative builders tax. You may find it at https://modelcitytaxcode.az.gov/Option_Charts/local.htm.
@Wes Blackwell thanks for the reply. I pulled this same info up online. I was looking to see if anyone has gone through the process and if there is a way around it.
@David Segal Are you hearing that the tax is added to permit fees and charged by the city? I haven't seen it in Phoenix.
@Michael Hacker no.... it’s a tax that is applied up to 24 months after the sale of the property. Seems to only be a focus on new construction or when you pull permits to add sqft.
They call it a speculative builder tax/ transaction privilege tax for doing business in the city. Every city has this and tax rates vary. In Phx its a 2.3% on 65% of the sale price. So if you sell a property as an investor that you enhanced for resale purposes with in 24 months, it would look something like this example:
Sale price: 1,000,000
- 35% deduction: $350,000
= $650,000 * 2.3% tax = $14,950 owed
The city basically sends you a bill in the mail up to 24 months later saying you owe this tax. One would think when you pull permits for new construction and adding sqft they would make you aware of this, instead of after the fact. Also it makes no sense why they do it on the sale price and don’t take into account the acquisition cost. The automatic 35% deduction they allow is for materials.