Sales tax deduction for home construction
Dear Tax Talk,
Can I take a sales tax deduction for taxes paid on building materials for my new home? The home is being built on land owned by myself and financed via a 35 percent down payment and construction loan. The builder is paid as we go via five or six "draws" based on completion of milestones. The land and home will never be in our builder's name. We carry all insurance and pay all real estate taxes throughout the build.
The sales tax deduction keeps getting extended every couple of years. While most folks know they can claim their state and local income taxes as a deduction, others may not be aware that alternatively you can claim a deduction for sales tax paid if it is greater than the income taxes. Obviously, folks that live in states with no income tax such as Florida and Texas will always opt to deduct sales tax paid. If you live in a state that imposes income and sales tax, you'll have to make a decision to determine which deduction is greater.
The Internal Revenue Service offers tables based on family size and income level for each state that provides an automatic deduction for sales tax. Certain big-ticket items can be added to the table amount. Alternatively, if you keep all your receipts, you can deduct actual sales tax paid during the year, including big-ticket items.
IRS Publication 600 states that you can consider a home as a big-ticket item if any of the following apply:
- Your state or locality imposes a general sales tax directly on the sale of a home or on the cost of a substantial addition or major renovation.
- You purchased the materials to build a home or substantial addition or to perform a major renovation and paid the sales tax directly.
- 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.
Ask the adviser
To ask a question on Tax Talk, go to the "Ask the Experts" page and select "Taxes" as the topic. Read more Tax Talk columns.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.