New Tax Rule for Builders: 'Residential' Contracts Get New 3-Year Accounting Look-Back

This legislation, dubbed the Fair Accounting for Condominium Construction Act, is a deep dive into the Internal Revenue Code, specifically Section 460(e), which deals with how construction companies account for long-term contracts. Simply put, it changes the tax rules for certain builders. The core change is swapping the term "home construction contract" for the broader term "residential construction contract" throughout this part of the tax code. This matters because it determines which projects qualify for an exception to the standard percentage of completion method of accounting—a method that requires companies to report income and pay taxes on a project as it’s completed, rather than waiting until the end.

Swapping 'Home' for 'Residential': What’s in a Name?

For most of us, "home" and "residential" might sound like the same thing, but in the tax code, the difference can mean millions. The bill replaces "home construction contract" with "residential construction contract" everywhere in Section 460(e). This is a technical move designed to clarify which types of buildings—like apartment complexes, condos, or maybe even certain mixed-use buildings—can use this special accounting exception. It’s about making sure the tax rules catch up with modern development, especially in dense urban areas where traditional single-family homes aren't the only 'residential' game in town.

The New 3-Year Rule for Builders

For contracts that aren't the standard "home construction" type but still fall under the new "residential construction contract" definition, the bill introduces a specific requirement to qualify for the accounting exception. Instead of the usual 2-year look-back period mentioned elsewhere in the tax code, these contracts must now meet a 3-year look-back period test. This change is a big deal for builders' cash flow. Using this exception means they can often defer paying taxes on project income until later, which is like an interest-free loan from the government. The extension to a 3-year look-back period for certain projects means the criteria for qualifying for this tax benefit are being redefined and potentially tightened for some types of residential work.

The Real-World Impact on Development Costs

While this bill might seem like just accounting jargon, it directly affects the bottom line for developers who build multi-unit housing. If a construction firm qualifies for this exception, they gain valuable flexibility in managing their finances, which can influence how they price housing units or decide which projects to take on. The bill also makes corresponding technical updates to the Alternative Minimum Tax (AMT) rules to ensure consistency, referencing the new "residential construction contract" definition there as well (Section 56(a)(3)). This is mostly housekeeping, but it ensures that the new definitions are consistently applied across different parts of the tax system. Importantly, these changes are not retroactive; they only apply to construction contracts entered into after the date the bill becomes law.