Residential Construction Contracts 2026: How Multifamily and Condo Builders Use the Completed Contract Method After OBBBA

Until 2026, only builders of homes and buildings with four or fewer dwelling units could escape the percentage-of-completion method (PCM) for long-term contracts regardless of size. A contractor building a 120-unit apartment project or a condominium tower was pushed into the percentage-of-completion/capitalized-cost method (PCCM), which taxed 70% of the contract as work progressed. Section 70430 of P.L. 119-21 (enacted July 4, 2025) extended the §460(e) home construction exception to all residential construction contracts and repealed PCCM, effective for contracts entered into in taxable years beginning after July 4, 2025.

For a calendar-year contractor, 2026 is the first year the new rule applies, and the 2026 return is where the method is adopted. On September 4, 2026 the IRS issued Rev. Proc. 2026-32, which supplies the automatic method change procedure. Contractors closing their 2026 books now should decide which contracts qualify and how to report them before the WIP schedule is handed to the tax preparer.

1. What Changed in Section 460(e)

2. Which Contracts Qualify: The 80% Test

Congress did not rewrite the definitions. A home construction contract is one where 80% or more of estimated total contract costs, measured when the contract is entered into, are reasonably expected to be attributable to building, rehabilitating, or improving dwelling units in buildings with four or fewer units, plus improvements to real property directly related to and located at the site. A residential construction contract is a contract that would be a home construction contract but for the four-unit limit. Three practical points follow:

• Mixed-use projects are the pressure point. Ground-floor retail, structured parking serving commercial tenants, or amenity space open to the public all count against the 80% threshold. Model the cost budget before signing, not at year-end.
• Transient lodging does not count. A building where more than half the units are used on a transient basis, such as a hotel or extended-stay property, is not a dwelling unit building.
• Subcontractors can qualify. The test looks at the contract's costs, so a framing, MEP, or drywall subcontract on an apartment project can be a residential construction contract in its own right.

3. The Second Layer: Section 263A and the $32 Million Test

Escaping PCM does not end the analysis. Under §460(e)(1), residential contracts must still capitalize costs under §263A unless the contractor (i) estimates the contract will be completed within three years of the commencement date (two years for a home construction contract) and (ii) meets the §448(c) gross receipts test for the year the contract is entered into. For tax years beginning in 2026 that test is average annual gross receipts of $32 million or less over the three prior tax years, aggregated across commonly controlled entities.

The result is a two-tier system. A $25 million multifamily builder can use CCM and skip §263A on an 18-month project. A $90 million builder can also use CCM, because the residential exemption itself has no size limit, but must capitalize indirect costs to the contract under §263A. Rev. Proc. 2026-32 covers both paths: DCN 275 to move from PCM or PCCM to an exempt method or to start §263A capitalization, and DCN 236 to stop capitalizing under §263A when a contractor meets both tests.

4. Effective Date: Both the Contract and the Tax Year Matter

The new rule applies to contracts entered into in a taxable year beginning after July 4, 2025. For calendar-year contractors, that means contracts signed on or after January 1, 2026; a contract signed in November 2025 stays on PCCM through completion. For fiscal-year contractors, check the first day of the fiscal year: a year beginning October 1, 2025 qualifies, but a year beginning July 1, 2025 does not, so those contractors wait for the year beginning July 1, 2026. Change orders and amendments that materially change scope can raise a new-contract question under Reg. §1.460-1(e), so document them carefully.

5. Worked Example: What the Deferral Is Worth

6. Making the Switch Under Rev. Proc. 2026-32

1. First-time residential contractor. If 2026 is the first year the company enters into a residential contract, adopting CCM on a timely filed return is an adoption, not a change in method, and no Form 3115 is needed.
2. Contractor already using PCM or PCCM. File Form 3115 under DCN 275 with the timely filed (including extensions) return for the year of change, and send the duplicate copy to the IRS. Rev. Proc. 2026-32 allows a reduced Form 3115: the identification and signature sections, Parts I and II (except line 16), Part IV line 25, and Schedule D, Part I.
3. Cut-off basis. The new method applies only to contracts entered into on or after the first day of the year of change. Existing contracts finish under the old method, and there is no §481(a) adjustment.
4. Five-year rule waived. The usual bar on repeating an automatic change within five years does not apply for the first or second tax year beginning after July 4, 2025.
5. Deemed consent for early filers. A contractor that filed a return on or before September 21, 2026 for a tax year beginning after July 4, 2025, and properly applied the new rules, is treated as having complied with §446(e).

7. Decision Framework: CCM Is Not Always the Answer

CCM maximizes deferral, but it bunches income into the completion year and defers losses as well as profits. Use this sequence before electing:

• Profitable contract, owners in a high bracket every year: CCM.
• Expected loss contract: consider whether an exempt percentage-of-completion approach or the accrual method gets the loss on the return sooner.
• Expiring NOLs or credits, or a low-income year for the owners: taking income now under an exempt PCM-style method may be worth more than deferral.
• Several large projects completing in the same year: model the bunching against the 37% bracket, the §461(l) excess business loss rules in surrounding years, and state tax.

8. AMT, Look-Back, and the Financial Statements

Practitioner analysis indicates that qualifying residential contracts no longer require a separate PCM computation for alternative minimum tax, which matters for individual owners of pass-through builders; confirm the AMT treatment against the amended statute before relying on it. Contracts reported under an exempt method are outside the §460(b) look-back, so the Form 8697 interest calculation drops away for new residential contracts. None of this changes GAAP: contracts are still accounted for under ASC 606 in the financial statements that sureties and lenders review, so expect a larger book-tax difference on the WIP schedule and, for C corporations, a deferred tax liability.

Common Mistakes

• Applying CCM to 2025 contracts. Contracts signed in a tax year beginning on or before July 4, 2025 keep PCCM until completion.
• Assuming every multifamily job passes the 80% test. Commercial space, public amenities, and transient units can disqualify a contract.
• Confusing the PCM exemption with the §263A exception. Large builders get CCM but still capitalize indirect costs.
• Missing the Form 3115. A contractor already on PCM or PCCM that simply starts using CCM without filing is on an impermissible method.
• Testing gross receipts entity by entity. The §448(c) test aggregates commonly controlled entities, which is common in builder-developer structures.
• Ignoring state conformity. States that conform to the Code as of a fixed date may not follow the change yet.

The Bottom Line

For multifamily, condominium, and residential subcontractors, the 2026 return is the first chance to take residential contracts off percentage of completion. On a $40 million apartment contract, that can mean deferring roughly $1.9 million of income compared with prior law. The work is in the details: test each new contract against the 80% threshold, run the $32 million and three-year tests for §263A, confirm the contract date against the tax year, and file DCN 275 with the 2026 return if the company already uses PCM or PCCM.

This article provides general educational information about long-term contract accounting under Section 460 as amended by P.L. 119-21 and Rev. Proc. 2026-32. It is not tax or legal advice for any taxpayer; contract eligibility, accounting method changes, Section 263A, AMT, and state conformity require separate review.