Residential Land Developers and the Completed Contract Method of Accounting

Construction|Real Estate|Tax

By Natasa Capuzzi

Under IRC Section 460(e), taxpayers that have large home construction contracts could defer taxable income until 95% of estimated costs have been incurred.  See our prior insight “Home Builders and the Completed Contract Method of Accounting” for further detail.
In a recent court ruling, a real estate development company was not able to use the completed contract method of accounting to defer income. The firm involved was a residential land developer that sold the lots to individuals or builders and not a homebuilder who constructed dwelling units.  Within the meaning of IRC Section 460(e), the developer would have to “build, construct, reconstruct, rehabilitate, or install integral components to dwelling units or real property improvements directly related to and located on the site of such dwelling units” to qualify for the completed contract method.
Due to the fact that the land developer’s bulk sale and custom lot contracts were long-term construction contracts, the developer was entitled to account for the gain or loss from these contracts on another long-term method of accounting to the extent the contracts were not completed within the tax year in which they were earned.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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