Insights

Buyers and Others Beware The Hidden Speculative Builders Tax

Michael Tiffany,  |  October 17, 2017

It has been said that there are only two things in life that are certain: Death and taxes. In the case of the speculative builders tax, many homebuyers and sellers find that this hidden tax can be a cost to them. This is not a tax that affects only speculators and builders – it affects sellers, buyers, contractors, and more. Furthermore, it usually affects them well after a sale is complete and when funds are scarce may be scarce.

What is the speculative builders tax? What does it mean for builders, real estate professionals, and owners? Is there a way to foresee whether the tax will be added to a property and how?

What is the Speculative Builders Tax?

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.

What Does the Speculative Builders Tax Mean to Builders, Real Estate Agents, and Brokers?

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.

What Does the Speculative Builders Tax Mean to Buyers or Sellers?

Because the owner of a property is subject to the speculative builders tax, either the buyer or the seller will be burdened with it. As the adage goes, caveat emptor…let the buyer beware.

The person buying a property should ask if improvements have been made and if so, whether this tax has been assessed and/or collected. If not, once closing is complete, the tax burden changes hands. The buyer can request that the real estate agent or broker include the taxes in the purchase price or that they be covered by the seller.

Naturally, a seller may have in mind a certain price. Anytime prior to closing, if the speculative builders tax has not been levied against property improvements, the city may come calling. If this happens, a seller may have to rethink their selling price. Think what would happen if the tax were to be imposed between the sale and the closing. A seller may find themselves in a bind.

Is There an Easy Way to Know if Phoenix, Scottsdale, and the Major Surrounding Cities Use the Speculative Builders Tax and How?

Although the speculative builders tax is somewhat hidden, it is hidden in plain sight. 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 .

Tiffany and Bosco is providing this information to property owners in the hope that it will save many from the difficulties that arise from simply trying to improve their properties. Property owners facing a claim for this hidden tax may have need of our services. If so, contact us today to schedule a confidential consultation.

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