Location may influence the value of real estate but timing is the more important variable from a tax perspective. By selecting an advantageous method of accounting, real estate developers can enhance the time value of money by deferring the recognition of taxable income on the sale of property. For planned developments, the completed contract method of accounting can provide developers with a powerful deferral tool to increase current cash flow while moving the tax man to the back of the line.

In Shea Homes, Inc. v. Commissioner, No. 14-72161 (9th Cir. Aug. 24, 2016), the Ninth Circuit affirmed the U.S. Tax Court's holding that the builder of a planned development could defer recognition of income from home sales pending the completion of amenities, common areas and infrastructure. The Court held that contracts with retail buyers to purchase homes were not completed until the developer satisfied its obligations to complete, among other things, common area improvements and amenities in the development. The developer in this case reported income on the completed contract method of accounting. 

With careful tax planning, developers of planned real estate projects can time common area expenditures and housing sales to create a tax deferral mechanism. Homes can be completed and sold to retail purchases, resulting in cash flow to the developer, while income from the sale may be deferred until a later tax period under the completed contract method when the developer completes construction of common area improvement and amenities.

The Ninth Circuit's decision reinforces the validity of another tax planning strategy available to real estate developers. Deferral under the completed contract method may also be combined with other tax planning strategies to increase a developer's after tax profit. The tax attorneys at McLaughlin & Quinn, LLC regularly work with real estate developers to provide full service tax planning solutions for real estate projects.

For more information on this Client Update, please contact Cory J. Bilodeau, Esq. at (401) 655-2203 or Matthew R. Joyce, Esq. at (617) 426-5877 ext. 228.