Regulations Proposed for Home Construction Industry

The Internal Revenue Service has proposed amending its regulations to provide further guidance to taxpayers in the home construction industry.

The proposed regulations involve the accounting for certain types of long-term construction contracts that qualify as home construction contracts under Section 460(e)(6) of the Tax Code. The proposed regulations expand the types of contracts eligible for the home construction contract exemption and amend the rules for how taxpayer-initiated changes in methods of accounting to comply with the regulations under Section 460 may be implemented.

They also expand the scope of the home construction contract exemption by providing that a contract for the construction of common improvements is considered a contract for the construction of improvements to real property directly related to the dwelling unit and located on the dwelling unit's site, even if the contract is not for the construction of any dwelling unit. Under the proposed regulations, a land developer that is selling individual lots (and its contractors and subcontractors) may have long-term construction contracts that qualify for the home construction contract exemption.

The proposed regulations also expand what is considered a townhouse or row house, for purposes of the home construction contract exemption, to include an individual condominium unit. This will have the effect of allowing each condominium unit to be treated as a separate building for purposes of determining whether the underlying contract qualifies as a home construction contract.