Did a model-home sale followed by the builder's continued use create a taxable landlord-tenant relationship, and what counted as rent?

Plain-English summary

The model-home buyer and builder created a landlord-tenant relationship for Florida sales-tax purposes after closing. Although the written rent was only $1 per month and often was not actually paid, the buyer received other economic benefits for allowing the builder to keep using the property as a model home and sales office.

The Department treated the post-closing use as a commercial real-property rental, not a residential lease. The agreement restricted the builder's use to a model home and office, even though the building could eventually serve as a residence.

Taxable rental consideration included the lease-related reduction in the home's sale price—measured by the Department as the difference between fair market value and the buyer's actual price—plus maintenance expenses, taxable utility charges, personal-property insurance premiums, and other payments the builder made for the buyer's benefit or owed under the lease.

What this means for you

A nominal rent figure does not control when a tenant supplies other value. Sale discounts, payments to third parties, and expenses assumed for a landlord can be part of the rent if they are consideration for the right to use the property.

Under the ruling, the buyer-landlord had to register, collect tax from the builder-tenant, and remit it unless the tenant obtained self-accrual authority. Timing also varied by benefit: the price discount was received at closing, while expense payments became taxable when the builder paid them.

Common questions

Q: Why was the arrangement commercial rather than residential? The lease allowed the builder to use the property only as a sales office and model home, not as living or sleeping accommodations.

Q: Did the $1 monthly rent set the tax base? No. The Department included all consideration, not just the nominal stated rent.

Q: How did the Department value the sale-price discount? It treated the difference between the property's fair market value and the buyer's actual price, to the extent due to the lease, as taxable consideration.

Q: Which operating costs could count as rent? Maintenance, taxable utilities, personal-property insurance, and other amounts the builder paid that otherwise were the buyer-landlord's obligations or benefited the buyer.

Q: Who had the collection duty? The buyer-landlord, unless the builder-tenant obtained the cited self-accrual authority.

Citations and references

• Fla. Stat. § 212.02(2) — business includes rentals and licenses of real property
• Fla. Stat. § 212.02(10)(h)-(i) — real property and licenses to use it
• Fla. Stat. § 212.031(1)(d), (2)(a), and (3) — noncash consideration, payment by the occupant, and timing
• Fla. Stat. § 212.07(9) — direct liability when an occupant cannot prove tax was paid
• Fla. Admin. Code r. 12A-1.070(4)(b) — all consideration paid for the right to use real property
• Fla. Stat. § 212.183(4) — self-accrual authority referenced by the Department
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-069

Original ruling text

SUMMARY

A model home constructed in a new development serves as a marketing tool providing prospective customers with an opportunity to view the work of the builder. The issue under review arises when the model home is sold. Initially, a home purchase agreement is executed establishing the sales price of the home, as well as the terms and conditions of the sale. Closing and transfer of title typically occurs within a month after the execution of the home purchase agreement. Along with the home purchase agreement, a model home lease agreement is executed between the builder and buyer. This lease agreement limits the builder's use of the leased premises to activities consistent with use as a model home and office for a period of 12-18 months from the closing date of the transaction. The lease agreement does not establish any material consideration ($1 per month) between parties, but defines the rights and responsibilities of each party. According to the lease agreement, utilities, model and pool maintenance, liability and personal property insurance are the responsibility of the builder during this time frame. The buyer is responsible for real estate taxes and homeowners insurance. In a typical scenario, the buyer has negotiated and the builder has granted a discount on the sale of the residence without any formal indication of what or how this discount was determined. The Department determined that the parties created a landlord/tenant relationship for sales tax purposes regarding the use of the model home after the closing.

Oct 22, 1997

Re: Technical Assistance Advisement 97A-069 XXX ("Company") XXX ("Contractor") Sales and Use Tax; Rental of Real Property Rule 12A-1.070(4)(b), F.A.C.

Sections 212.02(2)(10)(h)(i), 212.031(2)(a), & 212.07(9), F.S.

Dear:

This response is in reply to your letter dated July 23, 1997, requesting the Department's issuance of a Technical Assistance Advisement ("TAA") pursuant to s. 213.22, F.S., and Chapter 1211, F.A.C., regarding the referenced matter and parties. An examination of your petition has established that you have complied with the statutory and regulatory requirements for issuance of a TAA. Therefore, the Department is hereby granting your request for issuance of a TAA.

FACTS

The following facts have been provided to the Department:

Our client [Company] is a franchisor for residential homebuilders. [Contractor], a franchise of [Company], is a contractor that builds single family residential homes primarily in subdivisions. When an area for development is selected and the majority of the development infrastructure is complete, our client will construct a model home. After construction, the model home is completely furnished throughout with appliances, furniture, landscaping and other decor. All electrical and utility connections are made so that the model home is essentially ready for occupancy.

The construction of a model home in a new development serves a number of functions for the builder. The model home serves as a marketing tool providing prospective customers with an opportunity to view the work of the builder, as well as the design and layout of that particular model. In addition, the builder will typically use the model home as a sales office and information center for other homes and available lots within that particular subdivision. The sales office is typically constructed in the garage to avoid any structural problems and to minimize the efforts required to complete the home when sold. Since

the model home is completely furnished, it could serve as a residence if so desired by the contractor.

The issues at hand arise when the model home is sold. This generally occurs when the subdivision is near completion, or may also occur if a buyer prefers the location of the model home. In most cases, a significant amount of work is required of the contractor to return the model home to the intended specifications. The majority of these efforts relate to removing the sales office and completing the garage or other space used as a sales office. Additional construction may be necessary if the buyer requests changes at the time of sale. The time requirements for this construction will vary depending on the model home itself and the agreements reached in the sales contract.

A number of variations occur at this point as to what documents and arrangements are executed and entered into between the builder and the buyer. Initially, a home purchase agreement is executed establishing the sales price of the home, as well as the terms and conditions of the sale. Closing and transfer of title typically occurs within a month after the execution of the home purchase agreement.

Along with the home purchase agreement, a model home lease agreement is executed between the builder and buyer. This lease agreement limits the builder's use of the leased premises to activities consistent with use as a model home and office for a period of 12 - 18 months from the closing date of the transaction. The builder is given the authority to extend this period up to an additional six months on a month to month basis. In most cases the lease agreement does not establish any material consideration ($1 per month) between parties, but simply defines the rights and responsibilities of each party in regard to the property and is executed for legal liability purposes. In most cases, the builder never remits any payment to the new owner relating to this agreement.

According to the lease agreement, utilities, model and pool maintenance, liability and personal property insurance are

the responsibility of the builder during this time frame. The buyer is responsible for real estate taxes and homeowners insurance. Finally, the agreement provides specific home restoration requirements of the builder to be completed at the end of the period.

In a typical scenario, the original list price of the model home may exceed the final sales price indicated on the purchase agreement and closing documents as negotiated between the builder and buyer. This original list price is based on an itemized statement of charges including additions, deletions and other tangible property specific to the buyer's request. Line items appear in this statement for the model home cost, sales office and model discount. No dollar amounts appear for these items; however, as the purchase agreement indicates these amounts are to be determined between the buyer and seller. The itemized statement is incorporated into the purchase agreement by reference in an addendum to the purchase agreement. The purpose of this itemized statement is to define what is included in the purchase price.

None of the documents referenced above, or other potentially relevant to these discussions, address the differences between the ultimate sales price and the price reflected in the itemized statement. In any event, the buyer has negotiated and the builder has granted a discount on the sale of the residence without any formal indication of what or how this discount was determined. This is also true whether or not a sale and lease back transaction occurs. The final sales price for any home sold is generally less than the original asking price.

ISSUES

"Based on the above facts and circumstances, have the parties created a landlord/tenant relationship for sales tax purposes regarding the use of the home after closing?

"If the answer to the above is affirmative, what is the tax base in which sales tax should be computed and who is responsible for

registering the property?"

APPLICABLE LAW

Section 212.02(2), F.S., states in pertinent part:

(2) "Business" means any activity engaged in by any person, or caused to be engaged in by him or her, with the object of private or public gain, benefit, or advantage, either direct or indirect... [T]he term "business... includes... all rentals of or licenses in real property,.... (e.s.)

Section 212.02(10)(h) and (i), F.S., provides in part:

(10) "Lease," "let," or "rental" means leasing or renting of... real property....

(h) "Real property" means the surface land, improvements thereto, and fixtures, and is synonymous with "realty" and "real estate."

(i) "License," as used in this chapter with reference to the use of real property, means the granting of a privilege to use or occupy a building or a parcel of real property for any purpose.

Section 212.031(1)(d) and (2)(a), F.S., provides:

(1)(d) When the rental or license fee of any such real property is paid by way of property, goods, wares, merchandise, services, or other thing of value, the tax shall be at the rate of 6 percent of the value of the property, goods, wares, merchandise, services, or other thing of value.

(2)(a) The tenant or person actually occupying, using, or entitled to the use of any property from which the rental or license fee is subject to taxation under this section shall pay the tax to his or her immediate landlord or other person granting the right to such tenant or person to occupy or use such real property. (e.s.)

Section 212.07(9), F.S., provides:

Any person who has purchased at retail, used, consumed, distributed, or stored for use or consumption in this state tangible personal property, admissions, communication or other services taxable under this part, or leased tangible personal property, or who has leased, occupied, or used or was entitled to use any real property, space or spaces in parking lots or garages for motor vehicles, docking or storage space or spaces for boats in boat docks or marinas, and cannot prove that the tax levied by this chapter has been paid to his or her vendor, lessor, or other person is directly liable to the state for any tax, interest, or penalty due on any such taxable transaction. (e.s.)

Rule 12A-1.070(4)(b), F.A.C., provides in part:

The tax shall be paid... on all considerations due and payable by the tenant or other person actually occupying, using, or entitled to use any real property to his landlord or other person for the privilege of use, occupancy, or the right to use or occupy any real property for any purpose....

Based on our review of the facts and circumstances presented in your letter, the parties have created a landlord/tenant relationship for sales tax purposes regarding the use of the model home after the closing. In this instance, the buyer ("Buyer") of the property from the Contractor is securing several significant benefits from renting the subject property to the Contractor. First, Buyer is receiving a discount in the sales price of the property. Second, during the pendency of the lease agreement, Buyer is receiving the benefit of having the Contractor pay on its behalf the maintenance charges and certain utilities charges with respect to the real property, and the insurance premiums related to the personal property located within the rental property. Thus, Buyer clearly is in the business of renting real property. Therefore the Buyer/landlord should register with the Department to collect tax from the seller/tenant and remit the tax to the Department, unless the

seller/tenant obtains self-accrual authority under Section 212.183(4), F.S.

Because the lease between Buyer and Contractor restricts the Contractor's use of the subject property solely to a sales office and model home, the lease provides for a rental of commercial real property, and not for a lease of living quarters or sleeping or housekeeping accommodations. Thus, the transaction is governed under Section 212.031.

Pursuant to Section 212.031(1)(d), F.S., any type of property or services can serve as rental payments. Rule 12A-1.070(4)(b), F.A.C., which interprets the statutory provisions, emphasizes that "all considerations" paid by the tenant for the right to use real property, whether paid directly to the landlord or to another person on the landlord's behalf, are included in the taxable rent. While the rule does not define "consideration", Black's Law Dictionary (Sixth Edition, 1990) defines such term as follows:

[I]nducement to a contract.... Some right, interest, profit, or benefit accruing to one party, or some forbearance, detriment, loss or responsibility, given, suffered, or undertaken by the other...

If a landlord receives the economic benefit of a payment made by a tenant to another person, such payment constitutes consideration to the landlord. Similarly, if the landlord owes a sum of money to the tenant and, because of the existence of the lease between the tenant and landlord, the tenant reduces the sum the landlord owes to the tenant, the landlord has received a economic benefit (consideration) from the tenant. In both instances, such consideration will be a factor in the computation of the lease price, and ultimately, will determine the profitability of the property to the landlord.

Payments by the tenant of those maintenance expenses, utilities charges and insurance premiums that otherwise would legally be required to be paid by the landlord Buyer with respect to the subject property would be a taxable "thing of value," subject to Section 212.031, F.S. Additionally, the reduction in sales

price, due to the existence of the lease, that is due from the lessor Buyer to the lessee Contractor for the entire property transferred, also would represent taxable consideration. Thus, the difference between the fair market value of the property transferred, and actual price paid by Buyer of the property would be subject to tax. Any other payments required to be paid by the lessee Contractor to lessor would be taxable consideration.

If the lease agreement were to be extended by the parties for some period beyond the lease term, then the consideration for the negotiated by the parties. This amount might be a straight monthly charge, or it may be a certain monthly amount plus those amounts, such as maintenance charges, that are required to be paid by the lessee on behalf of the lessor.

Pursuant to Section 212.031(3), F.S., the tax is due and payable at the time the taxable consideration is received. In the case of the discount in sales price, this consideration would be received by Buyer at the time of the closing of the property. The maintenance charges, personal property insurance premiums, and any taxable utilities charges would be subject to tax at the time the lessee Contractor paid such charges. Any payments required to be made to Buyer by Contractor pursuant to the lease agreement, or upon any extension of the lease agreement, or upon any extension of the lease agreement, would be taxable when paid.

This response constitutes a Technical Assistance Advisement under s. 213.22, F.S., which is binding on the Department only under the facts and circumstances described in the request for this advice as specified in s. 213.22, F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised that subsequent statutory or administrative rule changes or judicial interpretations of the statutes or rules upon which this advice is based may subject similar future transactions to a different treatment than expressed in this response.

You are further advised that this response and your request are public record under Chapter 119, F.S., which are subject to

disclosure to the public under the conditions of s. 213.22, F.S. Your name, address, and any other details which might lead to identification of the taxpayer must be deleted by the Department before disclosure. In an effort to protect confidential information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or this response.

Sincerely,

Vicki Allen
Tax Law Specialist
Tax Policy and Dispute
Resolution

Control No: 30133