What Is A Speculative Builder And How Can Speculative Builders Pay Lower Real Estate Development Taxes?
Posted Wednesday, November 29, 2017 by Pivotal Law Group
Seattle is in a construction boom and many firms are engaged in large scale real estate construction projects. That often entails tax liability under Washington and Seattle sales tax and business and occupation (“B&O”) tax. But certain real estate developers may obtain a tax advantage by structuring their venture as a “Speculative Builder.”
Basically, an entity developing real estate the entity already owns may qualify as a Speculative Builder. Washington tax law provides a Speculative Builder owes no sales tax or B&O tax on the value of construction services performed on real property the Speculative Builder owns. This is in contrast to a conventional builder who constructs improvements on real property for consumers; such a builder pays B&O tax and must collect and remit sales tax. Depending on the nature of the construction work, operating as a Speculative Builder may reduce a real estate developer’s tax liability considerably.
This tax advantage only applies if the entity seeking to qualify as a Speculative Builder is the genuine, bona fide owner of the property being developed. The most obvious attribute of ownership is holding title to the property, so it is critical that any entity seeking Speculative Builder tax advantages obtain title to the property before construction begins. Additionally, Washington’s Department of Revenue applies a multi-factor test to determine whether a Speculative Builder’s ownership of property is bona fide. The factors are: (1) the parties’ intentions when the land was acquired; (2) who paid for the land; (3) who paid for improvements to the land; and (4) how all parties, including financiers, deal with the land.
This means that if a putative Speculative Builder’s ownership of property is a mere formality, with another entity retaining ownership of the property as a practical matter, the Department of Revenue may conclude that the would-be Speculative Builder does not genuinely own the land for tax purposes. Such a determination would deprive the entity of the Speculative Builder tax advantage. Similarly, the Speculative Builder tax advantage may not apply if the property being developed is transferred away from the putative Speculative Builder immediately after construction becomes complete. Further, selling the property in the midst of construction might disqualify the would-be Speculative Builder from the tax advantage.
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