New Tax Rule Swaps 'Home' for 'Residential' in Construction Accounting, Affecting Builders' Bottom Lines

This bill, the Fair Accounting for Condominium Construction Act, isn’t about building codes or zoning; it’s a technical cleanup job in the tax code that mainly affects how certain construction companies calculate their taxes. Specifically, it tweaks the rules governing the “percentage-of-completion” accounting method used by builders, particularly those working on larger residential projects.

What’s in a Name? A Lot, Actually

The core change here is purely administrative but important for tax compliance. The bill replaces the term “home construction contract” with the broader “residential construction contract” throughout Section 460(e) of the Internal Revenue Code (IRC). This is significant because Section 460 lays out the rules for long-term contracts. While most long-term contracts must use the percentage-of-completion method (meaning they pay taxes on profits as the work is completed), there’s an exception for smaller companies and, currently, for “home construction contracts.” By swapping in “residential,” the law aims to modernize and clarify which types of projects qualify for this exception, ensuring that the tax language matches the reality of today's housing market, which includes condos and other multi-unit dwellings.

The Three-Year Look-Back Window

Beyond the name change, the bill adjusts a key requirement for qualifying for that special accounting exception. To use the alternative, simpler accounting method, a construction business has to meet certain revenue tests. The bill changes the period for checking those requirements—the “look-back period”—from two years to three years. This means that when the IRS checks if a company qualifies for the exception, they will now look at the company’s average gross receipts over the three preceding years, not just two. For busy construction firms, this change might offer a slightly more stable or forgiving qualification window, smoothing out eligibility even if one year was unusually high or low.

Keeping the AMT in Check

Finally, the legislation makes sure the Alternative Minimum Tax (AMT) rules stay consistent with the standard tax rules. The AMT is a parallel tax calculation designed to ensure that high-income taxpayers pay at least a minimum amount of tax. The bill updates Section 56(a)(3) of the IRC, replacing “home construction contract” with “residential construction contract” in the AMT calculations as well. This is simply to ensure that if a builder qualifies for the new definition under the regular tax code, they are treated the same way when calculating the AMT.

Who Needs to Pay Attention?

If you’re not running a construction company that uses long-term contracts, this bill won't change your tax return. However, for residential developers, especially those building condos or larger apartment complexes, this is a procedural win for clarity. It ensures that the tax code’s language is precise and that the definition of what qualifies for certain accounting methods is consistent. Importantly, these changes only apply to contracts signed after the new law takes effect, so builders won't need to recalculate taxes on current projects.