Speculative building

[Fastyz450]

I am a licensed residential builder in AZ. I paid sales tax on all the materials to build a house. When I sell it will I be required to pay federal and state income tax as well as capital gains tax? Seems like like when it's all done someone else gets about 50% of the dollars generated from the project!

[Mike9241]

not so fast. if your business is building houses, the iRS views this as a business activity (not an investor activity) and the sale of inventory which produces ordinary income. discuss your activity with a tax advisor.  Depending on the tax structure of the entity doing the building you could also be liable for self-employment tax

[Hal_Al]

Q. When I sell it will I be required to pay federal and state income tax as well as capital gains tax? 

A.  Not exactly.  You will pay federal and state income tax on the profit you make on the sale, instead of (not in addition to) capital gains tax.  If you don't make a profit, you can deduct the loss.  

As others have said, for you (a contractor) this is business income, not an investment.  The profit will be taxed at ordinary income rates, not capital gains.  The  materials and the sales tax paid on them are considered "Cost of Goods sold" (COGS), sometime categorized as "inventory."

If your business is a sole proprietorship, you will also pay self employment tax  (up to certain amounts). Self employment tax" (SET) is how you pay social security & Medicare tax, on earned income when none was withheld.