Speculative Builder Tax

[David Segal]

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?

[Wes Blackwell]

@David Segal

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:

• https://modelcitytaxcode.az.gov/articles/4-416.htm
• https://modelcitytaxcode.az.gov/forms/S_speculative_builder.htm
• https://modelcitytaxcode.az.gov/models/Appendix_III.htm

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.