Completed Contract Method for Multifamily Builders

Episode 183 of the Construction Accounting Podcast with George Ghazarian, CPA · 5 min 37 sec · Published 12 August 2026

Build residential with more than four units per building and you have probably paid income tax on profit you had not collected, on jobs that were not finished. For years that was simply the law.

That rule changed and most builders have not moved on it. Here is who qualifies, what the deferral is worth, and the situation where taking it would be a mistake.

The Default Rule Taxes You Early

The tax code’s default rule for long-term construction contracts is the percentage of completion method. Forty percent done means you book forty percent of the estimated profit and pay tax on it — on an estimate, on a job that is not finished. Every contractor knows the last fifteen percent of a job is where margin goes to die: punch list, weather, retention you will not see for six months. Percentage of completion makes you pay early, on the most optimistic version of the job.

The Two Escape Hatches

There were two ways out. The first is the small contractor exception, which applies when average annual gross receipts are under $31 million for tax years beginning in 2025, rising to $32 million for 2026 and the contract wraps inside a defined window — a window that used to be two years and is now three. The second was the carve-out for home construction contracts, and that is where the money is. To qualify, at least 80 percent of estimated contract costs had to be attributable to buildings with four or fewer dwelling units. A fourplex qualified. A fiveplex did not. Apartments, condos, student housing and senior living were all excluded, and those are exactly the projects with the ugliest cash curves. Above the four-unit line, the best available option was the 70/30 hybrid method. Better than nothing, but not relief.

One Phrase Moved an Enormous Amount of Money

The exception used to apply to home construction contracts. It now applies to residential construction contracts. The four-unit ceiling is gone. Apartment buildings, condominiums, student housing and senior living projects can fall outside the percentage of completion regime entirely, reporting 100 percent of contract income on an exempt method such as the completed contract method, with no income recognized until the job is substantially complete, around 95 percent done. The old rules could also drag a qualifying contract back onto percentage of completion for alternative minimum tax purposes, which eliminated much of the benefit. That is gone too.

What the Deferral Is Worth

A multifamily builder with three apartment projects and eight or ten million recognized under percentage of completion can push seven figures of income into a later year. At combined federal and California rates, that is the down payment on the next project, funded at zero percent, legally. Getting out of percentage of completion also generally kills the look-back interest computation, so the win is bigger than pure timing.

Three Reasons This Could Be the Wrong Move

Deferral is not forgiveness. If three deferred projects all reach completion in the same year, you have built yourself a spike — one giant tax year, at higher rates. Deferral without modeling just rearranges when you get hurt.

Your surety and your bank do not care about your tax method. They underwrite off your WIP schedule and your GAAP financials, and they want percentage of completion. The election creates a book-to-tax difference, which is completely legitimate. Your tax return and your financials are allowed to disagree. They just have to disagree on purpose.

And this is a change in accounting method. You do not simply start doing it. It has to be filed correctly, and if someone tells you to just report it differently this year, that is not tax planning, that is an exposure.

The Order of Work

1. Run the 80 percent test on every contract: 80 percent of estimated cost attributable to dwelling units, in a building over four units. Contract by contract, not company-wide
2. Check the small contractor threshold as a second route, which also covers non-residential work
3. Model it forward at least three years and find the year where everything lands at once, then stagger completions around it
4. Talk to your surety agent before you file anything
5. File the method change properly, with a CPA who actually does construction
6. Rebuild the cash forecast and decide now what the deferred cash does — equipment, a key hire, self-funding the next project instead of borrowing at nine percent

One composite example: a general contractor doing high-teens millions, mostly multifamily, with three apartment projects mid-build and stuck on 70/30. Running the 80 percent test, moving the qualifying work to completed contract, staggering the completion dates and coordinating with the surety pushed seven figures out. He self-funded the front end of a fourth project instead of taking a construction loan. Nothing aggressive, nothing gray — he simply stopped paying tax years early on profit he had not collected.

The short version

• Percentage of completion taxes estimated profit before the last 15 percent of risk clears
• The exception now covers residential construction contracts, removing the four unit ceiling
• At least 80 percent of estimated contract costs must be attributable to dwelling units
• Qualifying contracts are no longer forced back to percentage of completion for AMT
• Deferral is timing, so stacked completion dates can build one very large tax year
• Switching requires a properly filed accounting method change, not just different reporting

Related episodes

• Is the Completed Contract Method Right for Your Jobs
• How Your WIP Schedule Drives Taxes and Bonding Capacity

Browse the full Construction Accounting Podcast archive

This episode is general information about how these rules work, not advice for your situation. Tax law changes and the right answer depends on your entity, your income and your circumstances. Talk to a CPA before acting on it.