From The Daniel Island News
Tax Benefits Extended For New Home Construction
By Clyde Hiers, CPA
Mar 20, 2013 - 9:50:10 AM
The ARB tells me there are 98 homes presently under construction or permitted to begin construction on Daniel Island. If one of those is yours, you better read this!
In 2004 Congress created Code Section 164(b)(5)(h) to allow taxpayers in all states to deduct either their sales taxes paid or their state income taxes. This provision was extended in 2006 by the Tax Relief and Health Care Act of 2006 for the years 2006 through 2012. It was scheduled to expire but was extended for at least one more year by the recently passed American Taxpayer Relief Act.
The exact wording of the statute allows those taxpayers not incurring state income taxes to deduct the amount from the optional sales tax table plus the general sales taxes paid on specified items. The statute includes as “specified items” motor vehicles, boats and aircraft. The last paragraph in the statute says that specified items include a home (including mobile homes or modular homes) or a substantial addition or renovation of a home if “you purchased the materials to build a home or substantial addition and paid the sales tax directly.”
This means that if you are building a home and you are writing the checks for the materials, you can deduct the sales taxes on your home. On a typical Daniel Island home, this sales tax deduction could be as much as $30,000 or more! Unfortunately, not many residents are going to engage a builder in an arrangement where the builder receives only a “fee” for supervising construction and the homebuyer pays all the bills on the construction project.
The statute gives you second chance to capture this deduction by further stating “Under your state law, your contractor is considered your agent in the construction of the home or substantial addition or the performance of a major renovation. The contract must state that the contractor is authorized to act in your name and must follow your directions on construction decisions. In this case, you will be considered to have purchased any items subject to a sales tax and to have paid the sales tax directly.” Is that the law in South Carolina? Is every contractor considered your agent?
Legal scholars contend a contractor in South Carolina is not automatically an agent of the homebuyer. The contractor can be an agent of the homebuyer if the contract so words. In this case the homebuyer will want to do one of two things. First, you can specifically word your contract to specify the contractor is your agent for purposes of the IRC Section 164 sales tax deduction. If so, the taxpayer will unequivocally receive the windfall sales tax deduction. More importantly, it does not increase or decrease the income recognized to the building contractor. If the contractor does not wish to alter the contract (either retroactively or prospectively) simply add an amendment to the contract whereby both parties agree that the contractor is an agent for the sales tax deduction. Clearly, the first option is stronger in the eyes of the IRS but the second option in all likelihood will be acceptable under examination. Regardless of which option you choose, you will want your attorney to draft the documents between you and your builder.
In South Carolina only tangible materials are subject to sales tax. Therefore, the deduction will only apply to the tangible materials that are in the home. Clearly the cost of the land, any and all labor and the contractor’s overhead and profit are not included in any sales tax deduction calculation. With that said, the homebuilder should be able to give you an exact amount of the total cost of the materials in the home. With today’s sophisticated homebuilder software, this is an easy calculation for your builder.
Is a taxpayer who buys a 100% completed home entitled to the sales tax deduction? As I read the statute, you are not entitled to a deduction after the fact. The statute clearly says, “your contractor is considered your agent in the construction of the home…” The word “in” is interpreted to mean “during” for purposes of this law. As such, you will be denied the deduction.
What if you “intercept” a spec home during construction, execute a contract to purchase, participate in the selection of materials and are involved in the ultimate completion of the home. Here I would say that as long as you were involved in a majority of the construction activity, you should be able to obtain the necessary legal documents to justify the deduction. Again, let your attorney do the heavy lifting!
If you start a home in 2013 but do not finish until 2014 are you still entitled to the deduction? You will still get the deduction if the materials were purchased in 2013, regardless of when the sale is closed. How long will this be available? Will it be extended again? No guarantee.
As with any itemized deduction, you run the risk of receiving less than full benefit if the Alternative Minimum Tax (AMT) is triggered within your return. Therefore, your ultimate tax savings is calculated on a facts and circumstances basis. The AMT is a very complicated subject and the impact, if any, should be discussed with your tax advisor.
Clyde L. Hiers, CPA, CFP, CFFA, M.S. (TAX) is located at 225 Seven Farms Drive. You can reach him at 843-471-1501 or Clydehiers@aol.com.
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