Policy Issues

Condominium Tax Accounting

August 21, 2019

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Real Estate Roundtable President and CEO Jeff DeBoer on August 23 wrote to Secretary Mnuchin regarding the tax accounting/recognition of income rules for new condominium construction.  The letter requests that the Treasury Department issue guidance providing relief from existing rules that unfairly accelerate the federal income tax liability on new condominium construction.  The guidance would not reduce tax imposed on new condominium development, but rather align the timing of taxes with actual income. 

Current condo tax accounting rules require multifamily developers of buildings with five or more residential units to recognize income and pay tax on their expected profit as construction is ongoing — well before pre-sale transactions are closed and full payment is due from the buyer.  This mismatch of cash flow and tax liability prevents income tax deferment until a condo building is finished.   Home builders of single-family homes, townhouses and row houses are not subject to this accounting rule restriction.  

The Treasury Department can solve this problem, however, and provide a lift to homebuilding and the economy by simply finalizing a previously proposed regulation that regrettably fell off the Department’s regulatory agenda in the last Administration.  Pending, proposed Treasury regulations would modify what is considered a home construction contract and clarify that condominium construction qualifies for the completed contract method of accounting.  Treas. Prop. Reg. §1.460-3(b)(2)(iii).  The proposed regulation would effectively allow each condominium unit to be treated as a separate building for purposes of determining whether the underlying contract qualifies as a home construction contract. 

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