Speculative builders play a vital role in the real estate market, constructing residential or commercial properties on their owned land for sale or rental purposes. This practice encompasses various activities, including “house flipping”, where properties are purchased, renovated, and sold for profit.

Speculative builders are subject to real estate excise tax on the selling price of the land (between 1-3% depending on the value of the property) and all associated structures and attachments including buildings and roads. However, it’s important to note that the sale of real estate is not subject to B&O tax or retail sales tax (about 7% combined).

Tax implications further vary based on rental duration. Long-term rentals exceeding 30 days are exempt from B&O tax, whereas short-term rentals incur retail sales tax and other applicable lodging taxes.

Speculative builders are considered consumers of all materials used in construction and cannot utilize reseller permits for purchases. Additionally, contractors hired by speculative builders are classified as custom prime contractors, necessitating sales tax inclusion in total contract prices.

Key Considerations in Land Ownership

Tax ramifications are intricately tied to land ownership. Whether prime or speculative construction applies depends on land ownership status. Attributes of ownership, beyond mere title, determine tax liabilities.

Four criteria outlined help identify ownership attributes:

1. Intentions of the parties in land acquisition.
2. Party responsible for land payment.
3. Party covering improvement expenses.
4. Manner of dealing with the land by all involved parties.

The attributes of ownership establish who has the rights and liabilities of a property owner. That is, who has the ownership rights and liabilities to the extent that a court would call that person the owner of real property, despite the fact that someone else may hold mere bare title to the property. Holding documentation which, by itself, labels a party to the transaction as landowner does not override the other attributes of ownership if those attributes are held by another person. Certain title transfers will be disregarded. For example, pre-sales agreements don’t confer ownership until close of sale. 

Navigating Joint Ventures

Joint ventures are commonly used to bring multiple parties together, facilitating real estate development. In many cases, the members of the joint venture include a person that owns property (landowner member) and a general contractor (contractor member). Tax obligations hinge on which entity owns the land and who is providing the construction services. If construction services are performed by a member as a separate entity on land owned by one of the other entities (the joint venture entity or landowner), the construction services are taxable as custom prime contracting. The contractor must collect retail sales tax on the full contract price (labor and materials) from the landowner. This is true even if the contractor is a member of the joint venture. It’s imperative to appropriately structure your legal relationships to predict the tax liabilities assigned to each entity.

Road Building

Generally, the construction of roads on private property by a prime contractor is a retail sale subject to retail sales tax on the full contract price (labor and materials). However, when the road will be deeded to a city or county, the construction is taxable as public road construction. In this case, the road contractor’s charges to the speculative builder are not subject to retail sales tax. A road contractor is the consumer of all materials it incorporates into the roads. This means the road contractor must pay retail sales tax or use tax on such materials. This includes materials provided by the speculative builder. However, if the speculative builder (landowner) has paid retail sales tax or use tax on the materials, the tax is not due again from the road contractor.

The speculative builder remains a consumer with regard to all materials purchased or produced for incorporation into the road. Therefore, the speculative builder must pay retail sales tax or use tax on materials provided to the road contractor. In this case, both contractors are consumers with liability for payment of retail sales tax or use tax on materials. However, the value of the materials is only subject to the tax once. Therefore, when one contractor has paid the tax, the tax liability has been satisfied with regard to those materials.

If the road is not finally dedicated to the public body within a reasonable period of time after the work is completed, the speculative builder will be liable for use tax on the charges of the road contractor. A reasonable period of time has generally been limited to one year or less.

PRESAGE Can Help You Navigate Speculative Building

Not sure if you’re a speculative builder or how to understand the various tax implications? We have served organizations in construction and construction-related industries since our inception, including speculative builders. You can count on our expertise to help you understand the rules, meet your goals, and stay in compliance.