Speculative builders construct residential or commercial buildings for sale or rental on land they own. Speculative construction includes the activity commonly referred to as “house flipping”; i.e., purchasing a structure and renovating it with the intent of reselling (or "flipping") it for profit. Speculative construction also includes the renovation of commercial, residential, or multifamily housing to be made available for rental on either a short-term or long-term basis, including property that will be made available for rental on an online marketplace.
Speculative builders, including those engaged in house flipping, are subject to real estate excise tax on the selling price of the land along with all attachments including, buildings, roads, and other structures. The sale of real estate is not subject to the B&O tax or retail sales tax.
If the real property is rented or leased on a long-term basis (30 or more continuous days), the rental income is not subject to B&O tax. See WAC 458-20-118. However, if a property is rented on a short-term basis (less than 30 days), the rental income is subject to retail sales tax, retailing B&O tax, and any applicable taxes on lodging. See our Personal home rentals guide and/or our Lodging guide.
A speculative builder is the consumer of all material incorporated into the real estate. A speculative builder may not use a reseller permit to purchase materials used in speculative building. Any construction contractor hired by a speculative builder is a custom prime contractor for tax purposes and not a subcontractor. Hence, any contractor performing construction services for a speculative builder must charge sales tax on the total contract price.
Payment of sales tax on goods delivered to job site
Effective July 1, 2008, speculative developers that have materials and supplies delivered to the job site pay sales tax based on the job site delivery location. Previously, the sales tax rate was determined by the vendor’s location.
As explained above, the definitions of custom and speculative building and the resulting tax consequences are based upon who owns the land. Building on land owned by another is prime construction (unless specifically defined otherwise) and building on your own land is speculative construction. Therefore, land ownership must be established to determine the proper tax application to the construction work performed.
The owner of real property is generally the holder of the recorded title. However, it is possible for a person to hold title to real property which he/she does not own. Therefore, attributes of ownership, other than mere title to the property, may determine the tax application.
WAC 458-20-170 identifies four criteria that can be used in determining who holds the attributes of real estate ownership (other criteria may be used as well). They are:
- The intentions of the parties in the transaction under which the land was acquired;
- The person who paid for the land;
- The person who paid for improvements to the land; and
- The manner in which all parties, including financiers, dealt with the land.
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.
Party A - Original Landowner/Seller
Party B - Contractor/Nominee
Party C - Customer/Purchaser
Party A wishes to sell its land. Party C wishes to purchase Party A's land and have Party B construct a house on it. For financing purposes, title is first transferred to Party B as nominee for Party C. At this point, the title will show Party B as "Grantee and Nominee." Then Party B constructs the home. Afterwards, Party B transfers title to Party C.
Although Party B is shown as title holder during construction of the home, he/she does not have the attributes of ownership. Therefore, Party B is not a speculative builder of the home, but is a custom prime contractor to Party C.
Certain title transfers will be disregarded
When an owner of real estate sells to a builder who improves the property and then resells the improved property back to the original owner, the builder is not taxable as a speculative builder. The total activities are taxed as custom prime construction.
Additionally, a prospective buyer will not be the owner of land by merely executing a purchase and sale agreement or pre-sale agreement with the contractor (even if a substantial amount of money is paid). In this case, there has not been a transfer of ownership rights and liabilities until the closing has taken place.
Selling a speculative home during the course of construction
When a speculative builder sells or contracts to sell property upon which there is a building under construction, all construction completed subsequent to the date of such sale or contract constitutes custom prime contracting.
The "retail sale" does not take place until the purchasers have the "right of possession" to the real property being constructed. Typically, the right to possession is transferred on the date of closing the property conveyance. Therefore, retail construction on what was originally a speculative house does not occur until after closing.
The formation of a joint venture is a common way to accomplish the development of real estate. Many times the members of the joint venture include a person that owns property (landowner member) and a general contractor (contractor member). The formation of a joint venture is the creation of a third entity. When construction takes place on the property, tax consequence is determined by the answers to the following questions:
- Which entity owns the land? Does a member or joint venture entity own the land?
- Which entity is providing the construction services? Is a member performing the construction services as a separate entity (prime contractor for the joint venture or landowner) or is the joint venture performing the construction services itself (contractor is performing service as a member of joint venture)? The answers to these questions will determine the tax liabilities of the joint venture entity and specific members.
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.
When a joint venture owns the land and the contractor performs construction services as a member of the joint venture (versus a separate entity), the joint venture is a speculative builder. In this case, the work performed by the contractor is a contribution to the capital of the joint venture. The joint venture entity must pay retail sales tax or use tax on materials purchased or produced for incorporation into the real estate.
To be treated as a speculative builder, a joint venture entity must actually exist and the joint venture entity must own the land and perform the construction itself.
Land ownership is established by the attributes of ownership as discussed above. The following factors are significant in determining whether construction activities are performed by a joint venture or by other parties involved in the construction:
- Was the joint venture specifically formed to perform the contract work?
- Did the formation of the joint venture begin prior to construction?
- Was the construction work actually performed by the joint venture (versus by a separate entity)?
- Were the funds handled as joint venture funds rather than as separate funds of any party to the joint venture agreement?
- Was there a contribution of money, property and/or labor so that any profit or loss incurred by the joint venture is proportionately shared by all members?
Where a member is guaranteed a fixed amount as compensation for construction services independent of any right to profit or gain, such amount is taxable as custom prime contracting.
Road building on speculative projects
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.