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By Alex in Mesa, AZ on 10/14/2007


My wife and I will begin building in New River (Phoenix) within the next week or so (just waiting on the underwriters). We plan to move out of state after living in the new place for two years, but I figure I'd analyze what I would have to pay in order to move out sooner. Other than short or long-term capital gains, what would be the consequences of living in the place for just a short time like three months, 6 months, or one year?

A friend mentioned that I may have to pay state/county taxes not normally assessed. I also thought about liability. I'm allowed to work on my own home without a license as an O-B, but what if I don't live in the place very long? At what point does the fed/state/county consider me a builder/developer (unlicensed) rather than O-B? I plan to seek out a licensed tax expert for advice, but I thought maybe someone here might know.

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By Phil in Peoria, AZ on 10/15/2007


Alex,

I am a GC in Glendale, and we do a lot of flips in this area. We are building our home in Peoria now. The only thing I would advise is you may have to claim your gain as ordinary income as we do, if you don't hold it long enough. Check with your tax advisor as I may be wrong, but I would ask anyway.

Phil


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By Justin in Chandler, AZ on 10/19/2007


I believe there are disclosure issues if you build your own home and live in it less than one year. I think you can be liable as a GC for defects in the home if you sell under a year, but after a year any defects should have worked themselves out by then.

I remember it from a real estate class a while back, but I would double-check on what disclosures or liabilities you may face if you sell in less than a year from completion.


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By Terry in Phoenix / Oracle, AZ on 10/19/2007


I definitely would check current Arizona law on this. As I understand it, an O-B that is not a GC is legally required to live in a home they built for a minimum of two years before selling (this is the time period someone has legal recourse against a contractor for problems with their work). There was a case a few years ago in New River just north of Phoenix of a man who was owner-building houses and then immediately selling them without being a contractor. He built six as I recall, before several of the owners came back against him for problems with their homes.

He was not only held liable for repairs, but was also civilly and/or criminally charged by the state for contracting without a license.


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By Phil in Peoria, AZ on 10/19/2007


Alex,

You can build your own house and sell it whenever you want. Like I said, the only thing you have worry about is taxes if sold within two years. (Unless you take a job somewhere else and have to move sooner - you can get that info from your tax adviser.) The only way you could get in trouble is if you start building and selling houses all the time, but one is not a problem. Don't let these guys scare you. Good luck.


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By Justin in Chandler, AZ on 10/20/2007


Phil,

I agree that taxes are a concern, short term gains would likely apply less than one year, long term less than two years, and no gain taxes over two years. Also, the following is from the Arizona Revised Statues regarding sales taxes.

From ARS:

42-5010. Rates; distribution base

(Caution: 1998 Prop. 105 may apply)

A. The tax imposed by this article is levied and shall be collected at the following rates:

1. Five per cent of the tax base as computed for the business of every person engaging or continuing in this state in the following business classifications described in article 2 of this chapter:

(i) Owner-builder sales classification: A. The owner-builder sales classification, comprised of persons who sell real property as improved at any time on or before the expiration of twenty-four months after the improvement is substantially completed, meaning suitable for the use or occupancy intended, shall be subject to tax under this classification for the purpose of taxing the sale of those improvements incorporated within that twenty-four month period.

I must strongly disagree that there are no other concerns however. If you sell under a year you are required to be licensed or you will be subject to prosecution and liability.

Again from ARS:
azleg.gov

32-1121. Persons not required to be licensed; penalties

A. This chapter shall not be construed to apply to:

5. Owners of property who improve such property or who build or improve structures or appurtenances on such property and who do the work themselves, with their own employees or with duly licensed contractors, if the structure, group of structures or appurtenances, including the improvements thereto, are intended for occupancy solely by the owner and are not intended for occupancy by members of the public as the owner's employees or business visitors and the structures or appurtenances are not intended for sale or for rent. In all actions brought under this chapter, proof of the sale or rent or the offering for sale or rent of any such structure by the owner-builder within one year after completion or issuance of a certificate of occupancy is prima facie evidence that such project was undertaken for the purpose of sale or rent. For the purposes of this paragraph, "sale" or "rent" includes any arrangement by which the owner receives compensation in money, provisions, chattels or labor from the occupancy or the transfer of the property or the structures on the property.

6. Owners of property who are acting as developers and who build structures or appurtenances to structures on their property for the purpose of sale or rent and who contract for such a project with a general contractor licensed pursuant to this chapter and owners of property who are acting as developers, who improve structures or appurtenances to structures on their property for the purpose of sale or rent and who contract for such a project with a general contractor or specialty contractors licensed pursuant to this chapter. To qualify for the exemption under this paragraph, the licensed contractors' names and license numbers shall be included in all sales documents.

The penalty: C. Any person who does not have an exemption from licensure pursuant to subsection A, paragraph 14, subdivision (c) of this section is subject to prosecution for a violation of section 44-1522. The attorney general may investigate the act or practice and take appropriate action pursuant to title 44, chapter 10, article 7.

If you are not exempt (sell or rent or even offer to sell or rent) prior to one year you will need to become a contractor becoming subject to prosecution. This will give the buyer recourse against you. Scare you or not, it is something to consider.

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By Phil in Peoria, AZ on 10/20/2007


Justin,

Thanks for the info, I guess it comes down to intent. If you knowingly build the house to sell, then you can get in trouble. But if you are transfered of take a new position somewhere else what can they do? I think we are splitting hairs, who really cares at this point, if you can sell your house in AZ take the money and run.


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By Alex in Mesa, AZ on 10/22/2007


Hey guys. Many thanks for the info! I had found 42-5010 and 42-5076 (they say the same thing), but I hadn't found that legal definition of an owner-builder. That's exactly what I was looking to see.

I still haven't spoken with a tax expert yet, but I hope to do so sometime this week. I'll post here with what he/she says.

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By Alex in Mesa, AZ on 11/15/2007


Hi All. I finally spoke with a certified tax professional last week, and I'm just now getting back here to update this thread.

There are city and state taxes that could be levied for selling a home you owner-built. There are simple ways to avoid the taxes, though. First, the tax pro said the state will not pursue you for those taxes if you do *not* sell the property before you obtain your certificate of occupancy. The city may still come after you if don't occupy the residence, though. The more you "occupy" the residence, the tougher you make the city's case against you. Occupy for a few months, change all your addresses of record, etc., etc. and there's pretty much no way the city could prove you intended to act as a developer. If you build in a county island, you won't have any problem with city and the state won't care as long as you get the CoO.

Federally speaking, the tax pro thought I'd be pushing my luck if I built and sold more than two houses in a five-year period. Since paying long-term capital gains is a better deal than paying the taxes a self-employed developer would pay, they (the IRS) might try to generate some revenue at my expense. 

However, occupying a house you build really increases the work the city, state, or federal authorities would have to do to prove you are a developer.
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