Thank you. I am in North Carolina.

First, be sure you want to write off the sales tax.

If you file an IRS Form 1040, and itemize deductions on Schedule A, you have the option of deducting state income taxes or state sales taxes but not both.

If you choose to deduct the sales tax, the IRS requires that there be a link between you and the seller of the construction materials. They are::

1) pay a general state sales tax on the house that is equal to the regular sales tax rate, or

2) buy the materials and pay the sales tax yourself, or

3) pay a contractor who was "acting as your agent" when purchasing materials and paying sales tax. That means the Owner-Contractor contract: must contain wording to the effect that the contractor is authorized to act in your name and must follow your directions on construction decisions. It would be wise to get the exact IRS wording from a tax advisor.

In fact the initial decision to deduct sales tax on a home should be made with the help of a tax advisor.

Many thanks for this advice!

(Washington has no state income taxes, and only recently gets to write off sales tax... So we take the sales tax deduction). :)

You need to make sure your BUILD CONTRACT is written to allow for the deduction. If the builder is financing, chances are you cannot take the deduction. If you are paying cash, or using a construction loan, you can if it's specified correctly.

My contract is :
Land $XXX,XXX
Fixed Price Build $XXX,XXX (subject to schedule A)
Realtor Commissions: $XX,XXX
Sales Tax: $XX,XXX
TOTAL: $XXX,XXX

The construction loan I am taking is the TOTAL less my down-payment. Thus, I am discretely paying sales tax per the sales contract, and it is thus deductible. In addition, if I pay out-of-pocket for upgrades with any
sub-contractor, I will keep those receipts as they are not within my
contract.

In NC, if you have state income tax (we don't in WA), you'll be able to deduct either one or the other. So, if you are used to deducting your state income tax for federal, and your sales tax is more, take the sales tax deduction. You can't take both.

HTH

Oh, and the reason the realtor commissions are called out separately is that they are non-taxable. I don't want to pay sales tax on top of commissions. My sales tax is 8.6% of the "Fixed Price Build" portion of the contract. For me it's about 35K in tax!

We just used the sales tax deduction this year after building our house. It only added a $270 to our total deduction amount. Not really worth all the paperwork and receipt collection for us. It might be different for you though.

The decision will be based on your anticipated income vs the anticipated cost of the materials for your house. IMO the end result would need to be substantial to make it worth the trouble of recording the sales tax and the possibility of shifting some of the contractor's liability to the owner.

You will need a good tax advisor and lawyer to help with the contract and to tell you if the IRS will accept the pass through of sales tax if the contract is based on a Lump Sum. There seems to be a contradiction since a builder is normally considered to be the ultimate consumer under a Lump Sum contract and calling him an agent under the owner's direct control might not be convincing to the IRS. It might be necessary to have two contracts, one for labor and one for materials or to have a Cost of the Work Plus a Fee contract where all costs are reimbursable.