In Arizona, custom-built homes or other improved real estate may be subject to the state's speculative builder tax. Towns and cities impose this tax, which must be paid on the twentieth of any month following a real-estate sale.
Sellers will fall under the tax when they either improve the property themselves or contract out for renovation or building services. While reconstructed property falls under the tax, unimproved buildings or other real property is exempt.
What Qualifies as Improved Real Property
The speculative building tax applies when:
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The property is a custom, model, or inventory home
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The improvements have started, and the property may or may not be finished
or
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A residential or commercial lot has been improved even without a structure on the property, such as paving or landscaping property
or
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Someone constructed water, power, or streets to the property at any time
or
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Any property put up for sale before it is completed or within 24 months of being substantially completed
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Substantially completed means a property passed a final inspection, has a certificate of occupancy, or can be immediately occupied or used
Property that falls under any of these categories will be subject to the speculative builder tax unless it falls under an exception.
Exceptions
One exception to the speculative builder tax is when an improved residence has been either a home or vacation property. In these situations, the tax won't apply.
A custom home will qualify as either a primary residence or vacation property when:
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The seller's immediate family has used the residence as either a primary or secondary home for at least six months prior to the property being put up for sale
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The seller hasn't sold more than two custom homes or similar properties in the last three years
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The seller hasn't rented out or otherwise licensed the property within two years of putting the house up for sale
All of these factors must be met to avoid paying the speculative builder tax.
Even if a property falls under the speculative builder tax, a seller may still be eligible for deductions and city credits. Arizona also has a standard 35 percent deduction.
If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.
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