I do not know the answer to your question, but would like to hear more about writing off sales taxes for OB's.

From our CPA...anything that you purchased, keep the receipts and make a list showing date, payee and amount of sales tax for the year. (I have mine in Excel.) The total for the year will go in on your 1040 or appropriate schedule.

Hold on here. Sales tax is deductible or state income tax is deductible (relatively new rule). In TX - there is no state income tax so it is a no brainer. In most states, most people spend far more on income tax than sales tax so in that case sales tax is not deductible. Now - if you are an OB - there is a chance that you will have more sales tax than income tax so just collecting receipts and totalling is all you need. But you will lose you state income tax deduction....

In NC - I think I pay about 7% state income tax and sales tax is about 7% (a little higher but less on food so about 7% on average). Since there are so many large expenses that are not taxed (ie mortgage, car (only 3%), all labor, insurance - you get the idea) and you should have some savings - it is really hard to have your total sales tax be greater than your income tax.

Now - an OB might have 200,000 in material cost (note all paid in 1 tax year) - subject to tax at least in NC. Then if you make less than 200k/year you can make sales tax deduction work. But I think for the majority of people, it would not be helpful in NC.

TX, FL, TN - different story...

As a tax accountant I will second what david cary said. Not all sales tax paid during the year is deductible however all that is paid on materials and expenses for building your house is deductible and for owner builders that can easily amount to more than your income tax deduction.

I kept all receipts and recorded everything in both Quicken and on an Excel spreadsheet. This record keeping is needed anyway in case you sell your home within two years and have to know the cost basis for reporting your gain. At the end of the year I simply totaled up the sales tax paid. Most bills from subcontractors listed sales tax separately (usually there wasn't any) and the lumber purchases and other odds and ends all listed the tax on the receipts. For the few things that I didn't have receipts for (like some small paint supply purchases) I simply divided the total by 1.06, (6% sales tax in IA) subtracted, and backed into the sales tax amount.

I was surprised at how much it came to and fortunately (or unfortunately depending on how you look at it) the sales tax deduction was quite a bit higher than our income tax.

I would think that if you use the material sales tax as a deductible then you can not use it later as part of the cost basis when you sell the house.

Even if that is true (which I'm not sure is the case) most people would come out better using the higher of state income tax or sales tax deduction since the exclusion amounts are $250,000 for single owners & $500,000 for married couples.

It is my understanding that a taxpayer can deduct either the local and state income taxes paid OR the sales taxes paid which ever is more beneficial to the taxpayer for any given year. The sales taxes can be the total of all sales taxes paid during the year (if one is so organized to keep all his receipts) or the amount based on income taken from a table provided by IRS in Pub 600 plus the amount of sales tax paid on cars, airplanes, boats and a home. There is some pretty specific language in that pub on page 4 about the deductibility of sales tax when you use a contractor.

Mike raises an additional point that I think one needs to consider when building a home. In my experience, you can only get a tax break for any dollar spent once. To me that says that if one deducts the sales tax one pays when one builds a house, then that sales tax cannot be included in the basis of the house. That means your basis is lower. For most of this, under current tax law, this isn't a big deal because of the $250,000/$500,000 exclusion on the sale of a primary residence and lower tax rate on long term capital gains. It actually is better to deduct the sales tax if one can. But if tax laws change and the lower tax rate on long term capital gains and/or the exclusion on the sale of a primary residence are eliminated, then maybe taking the deduction for sales tax isn't such a great idea. It could cost one money in the long run.

I haven't run any numbers and my crystal ball is very foggy regarding the future. I expect to see some major tax law changes after the elections in 2008.

Here is a link that might be useful: IRS Pub 600 State and Local Sales Taxes

In addition to the original post, my main area of concern is for sump-sum contracts with subcontractors. (ie painters, plumbers, etc. where the sub provides material and labor). These subs provide an estimate, I agree to TOTAL price, and they agree to my specs. Sub buys materials, completes work and is paid in full upon completion.

My home (in Texas) is now complete and none of my estimates indicate SALES TAX but I would like to pursue this deduction. IMO, the sales tax paid should be able to be utilized by me, but it however was not directly imposed on me. I think I will pursue gathering invoices from suppliers showing Sales Tax. As stated above, if these subs DO NOT pay sales tax is that responsiblity transfered to me for those materials????

I would ask your subs if they charged you any sales tax on the materials they used in your home and if so if you could have that documented on your receipt from them. You need a receipt or invoice that shows what sales tax you are deducting in case you are ever audited. Even the numbers that I backed into on my example I gave above, I went to Lowes and Home Depot afterwards and had them pull up my receipts (one advantage to using a credit card) and print them off so that I would have them for backup in case the IRS ever came looking.

States vary greatly on how they determine when sales tax is collected. Does Texas charge sales tax on the sale of a newly constructed home? If so, the builder would be exempt from paying sales tax on material that was used in the building of the home. Therefor your subs may not have charged you any and that is why it is not on their invoice. However, like I said, sales tax law varies greatly from state to state and I wouldn't want to give you advice there as I'm not a Texan. Maybe someone else here knows or you could research it on the internet or ask a local accountant.

As far as the cost basis goes, any sales tax you deduct and any energy credits you take will reduce your cost basis. The $250,000/$500,000 exclusion only applies if you have lived in your home more than 2 years. If you sell before then and have a profit you will need to know your cost basis and pay tax on the gain. And after the two years are up if you are lucky enough to have that kind of a gain you will also need to be able to figure your cost basis. So in short just keep good records of all your costs and any tax deductions & credits that you do end up taking. I would still take the sales tax deduction as it is guaranteed benefit to you this year whereas the other is hypothetical and unpredictable and a dollar saved today is always worth more than a dollar saved in the future.

The IRS allows a standard deduction for sales tax if you do not have your receipts for all normal daily purchases. Sales tax on construction costs are deductible above and beyond that standard deduction so it can amount to quite a bit. I'd say just ask your subs and see what they can come up with. They may not have charged you any sales tax. If they charged you tax they are responsible for reporting and paying that to the state so they would have records. If they paid sales tax on materials and didn't charge you any sales tax then you are probably out of luck. In theory, sales tax is typically charged to the end user but that isn't how it always works out. And some states charge sales tax on the sale of a home and others do not so if varies on who is considered the end user.

Sorry for the long winded explanation. Hope it make sense.

The Heat & Air contractor gave a lump sum bid with no sales tax broken out. I wrote him a letter asking for the sales tax that was (or I paid) on the units and he responded by letter with this information. Most all of the receipts the GC turned in were itemized with sales tax. P.S. I didn't pay the GC commission on the sales tax portion either, just on the material costs!

Re: "The $250,000/$500,000 exclusion only applies if you have lived in your home more than 2 years."

Just to clarify, there are special considerations/circumstances that allow one to still capture a portion of that exclusion if you live in the home LESS than 2 years. Change of employment location (over 50 miles I believe), for some health reasons requiring a move, military, etc. are some of those.

Our painter never did give us the sales tax breakout for the paint and caulk. I suspect that's because he bought it with a sales-tax exempt certificate to keep his costs down, then he lump sum billed the whole thing and pockets more margin. It was not a huge deal for us as we had earth plaster inside and stucco outside and thus, not much paint.

We didn't have any issues with most other subs, but they knew up front. I think you may have a very hard time going back after the fact, as it takes time to do this for them and most small subs are not set up for such details. Good luck!

As I previously noted, there are very specific circumstances that you can deduct sales tax paid by one of your contractors on materials purchased to be used on your house.

As per IRS Pub 600, page 4, left column, line 7, item 3:

"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 the 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."

IHMO and based on my experience as a tax preparer, you need to read your contract and know your stateÂs laws before you take a deduction for sales taxes paid by your contractor. Some of you will be pleasantly surprised and others will be unhappy.

Just a followup: I contacted the subs who truly had turn-key portions of my home and all paid sales tax, and all were willing to provide a receipt showing these items. An important item for those currently building is to get this before the last payment is made.....thanks for the responses.