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