SB1687 amends Internal Revenue Code section 460 to replace the term "home construction contract" with "residential construction contract" and to treat some residential contracts as qualifying for the completed‑contract exception by substituting a 3‑year test for the current 2‑year rule where the contract is not a home construction contract. The bill also updates the cross‑reference to the alternative minimum tax provision in section 56(a)(3).
Why it matters: the change extends the narrow completed‑contract accounting relief to a broader set of residential projects — explicitly aiming at condominium construction that often spans more than two years — which lets affected contractors defer taxable income until completion rather than report it pro rata under the percentage‑of‑completion method. That has material cash‑flow, tax‑timing, and compliance consequences for developers, lenders, tax advisers, and the Treasury.
At a Glance
What It Does
The bill amends IRC §460(e) by changing the statutory term to "residential construction contract" and instructing that, for residential contracts that are not "home construction contracts," the temporal test in subparagraph (B)(i) is read as a 3‑year rather than a 2‑year period. It also revises the AMT cross‑reference in §56(a)(3).
Who It Affects
Condominium and other multiunit residential developers who enter customer sale/contract arrangements; tax advisors and accounting departments that determine income recognition for construction contracts; lenders and investors that underwrite project cash flow and tax timing. The IRS and state tax authorities also face changed enforcement and revenue timing.
Why It Matters
Shifting the test from two to three years and broadening the contract label effectively allows more residential projects—especially condominiums with longer build schedules—to elect completed‑contract treatment, producing near‑term tax deferral and altered reported income for contractors and investors.
More articles like this one.
A weekly email with all the latest developments on this topic.
What This Bill Actually Does
Section 460 of the Internal Revenue Code generally forces long‑term contractors to use the percentage‑of‑completion method, which recognizes income as work progresses. A narrow exception currently labeled for "home construction contracts" (shorter projects) lets qualifying contracts use the completed‑contract method, deferring taxable income until the job is finished.
SB1687 widens that exception by changing the statutory term to "residential construction contract," and by telling the statute to treat certain residential contracts as satisfying the timing test using a three‑year window instead of two.
Practically, the bill lets developers of condominiums and similar residential projects — which often take longer than two years to build and sell — qualify for completed‑contract accounting if their contracts meet the other conditions of §460. By amending the AMT cross‑reference in §56(a)(3), the bill makes the same expanded category relevant when calculating alternative minimum tax adjustments, so taxpayers who use the completed‑contract method under the new rule will have the AMT rules aligned to that change.The bill also cleans up paragraph numbering in §460 and contains a single effective‑date clause: the amendments apply only to contracts entered into after the date of enactment.
That creates a clear cutoff (and a potential structuring incentive for contracts executed before enactment) and limits retroactive application. Compliance teams will need to review contract language and expected completion dates to decide whether a contract qualifies under the new 3‑year read‑across and to adjust tax provisioning and cash‑flow forecasts accordingly.
The Five Things You Need to Know
The bill amends Internal Revenue Code §460(e) by replacing the phrase "home construction contract" with "residential construction contract.", For residential construction contracts that are not "home construction contracts," the statute will be read to substitute a 3‑year test for the current 2‑year completion test in subparagraph (B)(i).
SB1687 changes the cross‑reference in §56(a)(3) (the alternative minimum tax provision) so that the expanded "residential construction contract" category governs AMT adjustments as well.
The text redesignates and renumbers paragraphs within §460 (striking paragraph (4) and redesignating paragraph (5) as paragraph (4)) as a technical cleanup accompanying the substantive change.
The amendments apply only to contracts entered into after the date of enactment; they do not reach contracts already in place on that date.
Section-by-Section Breakdown
Every bill we cover gets an analysis of its key sections.
Rename and broaden the qualifying contract category
This paragraph replaces the statutory term "home construction contract" with "residential construction contract" in §460(e)(1). It also appends parenthetical language instructing that, for residential construction contracts which are not home construction contracts, the timing requirement in subparagraph (B)(i) should be read using a 3‑year horizon instead of 2 years. The practical effect is to broaden the class of contracts eligible for the completed‑contract exception and to lengthen the short‑term completion window for non‑home residential projects.
Technical renumbering within §460
The bill strikes the existing paragraph (4) of §460(e) and redesignates paragraph (5) as paragraph (4), then updates an internal cross‑reference in the provision. Those are drafting and organizational changes intended to keep the statutory structure coherent after the substantive insertion in paragraph (1). Practitioners should note the renumbering when citing §460(e) in opinions and returns.
Align AMT cross‑reference with the expanded category
This amendment changes the language in §56(a)(3) to refer to a "residential construction contract (as defined in section 460(e)(4))" rather than the older "home construction contract" reference. In short, the alternative minimum tax adjustment will use the newly broadened definition, so AMT computations will track whichever contracts qualify for the completed‑contract exception under the revised §460.
Effective date and scope
The bill applies its amendments only to contracts entered into after enactment. That single effective‑date clause limits the change to new arrangements and creates a clear boundary for taxpayers and advisors deciding whether to restructure or accelerate contract signings before the law takes effect.
This bill is one of many.
Codify tracks hundreds of bills on Finance across all five countries.
Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Condominium and multiunit residential developers — they can elect completed‑contract accounting for more projects, deferring recognition of profit until project completion and improving near‑term cash‑flow and tax timing.
- Investors in residential development projects — deferred taxable income at the contractor level can change projected after‑tax yields and alter investment timing and returns.
- Small and mid‑sized builders whose projects straddle the previous 2‑year cutoff — these firms gain a clearer path to completed‑contract treatment without invoking the shorter home‑construction label.
Who Bears the Cost
- U.S. Treasury (federal revenues) — broader access to completed‑contract accounting permits income deferral, reducing near‑term federal taxable receipts relative to percentage‑of‑completion treatment.
- IRS and state tax authorities — they must update guidance, audit criteria, and enforcement resources to police eligibility, expected completion dates, and potential abuse of the new 3‑year standard.
- Lenders and underwriters for long‑term residential projects — changes in taxable income timing may complicate debt service coverage metrics, covenants, and credit assessments, requiring revised underwriting models.
Key Issues
The Core Tension
The bill balances industry fairness against budget integrity: extending completed‑contract relief recognizes that condo and similar residential projects frequently exceed a two‑year build cycle, but doing so permits widespread tax deferral that reduces near‑term federal receipts and invites structuring; regulators must choose between generous, administrable relief and tighter rules that guard revenue and limit abuse.
The bill trades a narrow timing rule for a broader categorical expansion without adding a statutory definition of "residential construction contract." That omission creates an immediate interpretive question: how will the IRS and courts distinguish a "home construction contract" from the broader "residential construction contract," and will certain multifamily or mixed‑use projects qualify? Absent regulatory definition, taxpayers and auditors will test the boundary, which risks inconsistent treatment across cases and states.
A second tension is the timing arbitrage and structuring risk. By making the change prospective only, the law creates an incentive to time contract signings or to amend existing contracts to fall on the appropriate side of the effective date.
More broadly, expanding completed‑contract eligibility increases the opportunity for legitimate income‑timing management and for abusive arrangements that stretch or compress project schedules to capture deferral. The IRS will need audit guidance and perhaps safe harbors to limit gamesmanship while preserving the intended relief for true condominium construction timelines.
Finally, the AMT alignment reduces a mechanical mismatch, but it does not eliminate interactions with state tax regimes or financial accounting standards. Contractors will need to reconcile tax deferral with GAAP revenue recognition and with any state income tax differences, which can create bookkeeping complexity and temporary effective tax rate volatility for public and private firms.
Try it yourself.
Ask a question in plain English, or pick a topic below. Results in seconds.