Amendments to the Model City Tax Code that take effect April 1, 2019 are generally favorable to taxpayers, but some of the provisions will require careful consideration and planning to avoid surprises. Cities and towns imposing taxes are required to adopt the amendments.
The amendments include:
- Expanding the existing exemption for sales between residential speculative builders for partially improved real property to apply to commercial speculative builders, if the buyer agrees in writing to assume liability to pay any tax due when the property is later sold. It is not clear in the Code whether the speculative tax liability continues indefinitely until the subsequent sale of the property to a buyer that is not a speculative builder or how the new rule will work with the 24-month after substantial completion exclusion for commercial property.
- Clarifies that only the first sale after a certificate of occupancy is issued is subject to speculative builder tax, and subsequent improvement or expansion of the original building is not considered taxable. Improvements to land containing no structure, such as paving and landscaping, will still require careful review.
- Adds a clear exemption for the present value of in-place leases, which will reduce the taxable value, and provides for separate valuation methods for residential and commercial leases. Under this exemption, the timing and terms of leases may have a significant impact on the speculative builder tax due. A lease with a term of 30 years or more (including all renewal options) is deemed a sale of improved real property and not an in-place lease.
- Clarified that the taxpayer is entitled to a credit for any state and local contracting taxes paid by the contractor for the work on the property and a credit for any speculative builder tax paid by a prior owner of the same property.
Any transfer of real estate within an Arizona city or town (including long-term leases and transfers of beneficial interests in the owner) may trigger the speculative builder tax, with current rates ranging from 1.5% to 5.5% of the gross receipts (subject to credits, deductions, and adjustments). The speculative builder tax is peculiar to Arizona and investors, developers, and builders, and their attorneys, should determine whether the tax is applicable to the specific transaction. Even sophisticated real estate professionals that are used to applying the current rules, should take a fresh look at the new amendments.