(Greg Latza for The Wall Street Journal )

In the sun room of his newly renovated, 7,700-square-foot mansion in Sioux Falls, S.D., Kevin Tupy and his listing agent gazed at the luxury homes sprouting up on the plains.

“That one’s worth $7 million,” said his agent, Liz Lloyd, pointing to a 12,000-square-foot brick mansion built around 2010. A few blocks away is a rustic-contemporary home that sold for nearly $2.5 million last year—the record-high home sale for Sioux Falls.

Mr. Tupy, 48, a venture capitalist, bought his six-bedroom contemporary home less than two years ago for $1.24 million. Now he and his wife, Delena, a homemaker and the reigning Mrs. South Dakota, are preparing to list the home for $1.5 million, to trade up to a larger home with more amenities.

There’s nothing little about these houses on the prairie. Fueled by a mix of business-friendly tax laws and rapid growth in the medical and financial fields, Sioux Falls is experiencing a boomlet in the luxury-home market.

Some affluent buyers, not finding what they want in existing stock, are building their own—and bringing new styles and amenities to town. Real-estate agents predict a wave of sales at record prices. But building big and pushing the boundaries of local tastes come with risks: It isn’t unusual for million-dollar listings to sit on the market for years, or for homeowners to spend more than they can recoup when they sell.

“Holy cow, things are busy,” said Bob Natz, a local home designer who says business has picked up since 2010. In the past year, his firm has designed three luxury homes, from $1 million to $1.5 million, with much of the demand coming from doctors. The two largest employers, medical providers Sanford Health and Avera, account for roughly 17,000 jobs in the city, which has one of the lowest unemployment rates in the country at 2.8%. With a population of 178,500, the city saw a 3% growth in population last year. There is no state income tax, and favorable corporate and banking rules have attracted the likes of Citibank and Wells Fargo .

Until recently, the luxury homes “just weren’t there,” said Beth Jamison, president of the greater Sioux Falls real-estate association. While the market’s median sale price is $183,000, there are now 16 homes currently listed for $1 million or more, said Aaron Rietsema of Hegg Realtors. Last year, eight homes priced at $1 million or more sold, up from six the previous year and four in 2014. Only four homes have ever sold for $2 million or more, including the record $2.49 million home sold in 2016 to basketball player Kirk Hinrich, agents said.

That could soon change, said Kathy O. Allen, a Re/Max agent who says she has a home that could close in the $4 million range, setting a record. The most expensive home on the market publicly listed for sale, an ultramodern estate in the northeast corner of town, is listed for $2.45 million.

(Greg Latza for The Wall Street Joiurnal)

Meanwhile, new luxury homes are rising. In 2016, there were 695 permits for new, single-family homes issued, nearly double the volume since the market low in 2011 and the highest since 2014, said the city’s director of planning, Mike Cooper.

The change is evident downtown, where a sushi shop and a farm-to-table cafe compete with dimly lit bars serving a local favorite, chislic—hunks of fried beef served with toothpicks and a side of ranch dressing.

An imposing stone clock tower on the low-slung skyline, built in the 1800s with ornate blocks of red Sioux quartzite, will soon be joined by a modern mixed-use condo project using the same quarried stone. The seventh-floor penthouses of that building will sell fully finished for about $1.8 million, said Chris Houwman, one of the developers.

With new buyers come new ideas. Matthew Roach, 36, a partner at the Sioux Falls-based Pride Built Homes, says he has completed five homes since 2015, all of which bring something different to the rows of earth-toned, steeply pitched rooflines that dominate the area.

“We like to call it coastal,” Mr. Roach said about the style of his latest project, a newly built 5,050-square-foot, light-gray contemporary that has little resemblance to the typical Midwest rambler. The entry opens to a double-height foyer and an open floor plan with light-hickory flooring. Carrara marble in the kitchen ties together all-white cabinetry and an Arabesque backsplash.

The house is wired for voice commands and home automation, and the roomy garage—a must-have in the city because of the brutal winters—holds five cars and includes an audio system. It was listed for $999,000 with the Fisher Sisters of Ameri/Star. The home is already under contract, Mr. Roach said, but he declined to disclose the buyer’s name.

(Greg Latza for The Wall Street Journal)

“It was a big risk for us,” Mr. Roach said, adding that this is one of the most expensive and unusual spec homes in the city. But he was encouraged by past projects: A Cape Cod-style home his firm built sold for $753,700—close to the $779,000 asking price—in two days. A recent client had them remodel a home in the French-country style, and they expect an airy, modern Craftsman they built to have an offer before it hits the market.

Like Mr. Roach, builders Troy Stallings, 61, and his wife and business partner Jane Shorma, 55, were tired of the finishes found in many Sioux Falls homes.

“Everything is oak here—oak cabinets, oak floor, oh God,” said Mr. Stallings, who has been building there for 20 years.

Instead, the couple in 2008 built an Old World-inspired stone home, with Peruvian limestone flooring and a free-standing maple-wood staircase. The asking price was about $1.5 million when the real-estate market stalled. So they decided to live in the 6,600-square-foot home full time in hopes of an uptick.

“If these luxury homes are taking two to three years to sell, we’ve got to find new ways to sell,” said Lee Harding of Keller Williams Ratchford Group. When he listed the home last spring at a reduced price of $1.25 million, he took out ads in national media and made a slick video with drone footage.

He was preparing to put the home up for auction with a minimum sale price of $960,000. Then a local buyer approached them before the auction with an offer above the minimum bid, Mr. Stallings said, and it’s now in contract. The couple plans to build again in the area, with an eye toward tech features that young professionals will like.

(Greg Latza for The Wall Street Journal)

Part of the problem facing the next wave of luxury home sellers will be setting expectations, said Rocky Rehfeldt, senior vice president at Sioux Falls-based lender Loft Advisors. “North of $1.5 million, we have appraisal issues,” he said, noting that lenders don’t see value in some more extravagant renovations, which could hobble negotiations. Even when financing isn’t involved, a lack of comparable properties at the top of the market can make it harder to justify passing the cost of some renovations onto the buyer.

At the Tupy residence, a land surveyor was measuring the yard for a new outdoor pool. “I think it’s just expected” if they want to get the $1.5 million asking price, Mr. Tupy said. He put about $350,000 into renovations, including a $200,000 home theater where he and his son, Curtis, watch sci-fi flicks.

The Tupys, who have two teenage children, are selling to trade up to a larger home—roughly 10,000 square feet—with amenities like a wine cellar and a bigger yard. If he can’t find what he’s looking for, he may build new nearby.

“It’s not going to be a moneymaker,” he said about the home’s resale potential. “But we got to enjoy it.”