As a tax professional, real investors may come to you looking for ways to mitigate taxes. They may even be aware that a key tax strategy is to place their properties in business entities. They may not be expecting you to start asking questions about their accounting method. This is a great example of the expertise you can offer—changing an entity’s accounting method is an often overlooked tax strategy for real estate holdings.
The first step in applying this strategy is to make sure you are clear on the available accounting methods, some of which are fairly specific to real estate businesses. Today we’ll cover the pros and cons of the four accounting methods: cash, accrual, percentage of completion, and completed contract.
Today we’ll discuss the main four steps to using a change in accounting method as a tax strategy.
Understand the Available Methods
When evaluating the methods, the main question you are looking at is when is income recognized? You will be balancing your client’s needs when it comes to:
• Timing
• Tax Rate
• Cash Flow
Combined, this forms their total tax efficiency. This means you are looking not just at their current income, tax rate, and cash flow needs but projecting into the future to determine when income recognition would be the most beneficial. Keep this in mind when evaluating the four different accounting methods.
Cash
Most small businesses can use the cash method, and many of them will prefer it because it’s so straightforward and easy to track. Under the cash method, tax is paid when cash is received, and expenses are deducted when cash is paid. It’s as simple as that. Small businesses—those with less than $31 million (for 2025) in average gross receipts—that are not C corporations or tax shelters can typically use the cash method. This can be a strong choice for businesses that qualify and do not want to invest more in their tracking and accounting processes.
Accrual
C corporations, businesses with a large inventory, and larger businesses (with over $31 million in average gross receipts) may be required to use the accrual method of accounting. The accrual method recognizes income when it is “earned,” regardless of when the cash is actually received. “Earned” has a very specific definition when it comes to the accrual method—and it all depends on the “all events” test and the “economic performance” rules.
The all events test says that you must recognize income when all events have occurred that fix the right to receive the income, and the amount can be determined with reasonable accuracy. Income recognition “triggers” include the property’s title passing to the new owner or when the new owner takes possession of the property and assumes the benefits and burdens of ownership. This is typically going to happen at closing unless the developer gets non-refundable progress payments or the buyer takes control earlier.
As you may notice, these rules can pose a challenge to cash flow. Once ownership has been transferred, the seller must recognize all of the income for that project, but months could pass before the seller actually receives the cash. This can create “phantom income” and can make tracking available cash a more complex process.
The economic performance rules say that when a taxpayer can deduct a liability or expense when services or property are provided by the taxpayer. For example, this means that developers cannot deduct future rent payments in the current year. This also means that if a developer incurs debt in order to pay for property maintenance or repairs, those expenses cannot be deducted until the services are provided.
The accrual method of accounting comes with a number of drawbacks, but it does provide a more accurate financial picture than some other methods.
Percentage of Completion
The percentage of completion method (PCM) is one of two accounting methods that are fairly specific to real estate businesses. Before the “One Big Beautiful Bill” Act, PCM was the required accounting method for developers working on long-term contracts. Under PCM, the developer must recognize income as the work progresses. This means income calculations must be run on a year-by-year basis. Each year, the income recognized will equal to the percentage of total estimated costs incurred to-date.
Under IRC §460, long-term contracts are subject to special rules. For instance, PCM has its own economic performance rules. Developers using PCM can deduct some of expenses before performing the full contract. They can also use progress billings—incremental payments that occur before the project is 100% complete.
The percentage of completion method can be helpful in allowing developers to recognize income slowly over time, avoid phantom income, and improve cash flow as the project is still underway.
Completed Contract
Finally, we have the completed contract method (CCM) where the developer is taxed when the construction is complete, and the buyer’s obligation is fixed, typically when 95% or more of the costs have been incurred. One benefit of this method is that you can exercise a certain amount of control over timing through how the contract is written. Take, for instance, a scenario where a developer is constructing multiple homes on a tract of land. Is the contract considered complete when each home sells? Or is the contract considered complete when the entire development is completed? A lot depends on how the contract is written.
CCM can also be beneficial because it avoids phantom income, and the developer can benefit from progress billings, just like with PCM.
Determine Eligibility
As mentioned above, eligibility rules for certain accounting methods have shifted within the past year under the “One Big Beautiful Bill” Act. Previously, most developers using long-term contracts were required to use the percentage of completion method. The only developers who could use the completed contract method were home construction contracts with less than four dwelling units and those who qualified as small business (average gross receipts under $31 million for 2025).
Now, the OBBBA has expanded eligibility for the completed contract method. As of July 1st, 2025, developers with residential construction contracts can use CCM. This means that developers of condos, subdivisions, subdivision, and multifamily projects are eligible and can take advantage of the opportunity to defer income recognition until the project is complete.
Summary
The rules and limitations surrounding accounting methods can leave taxpayers’ heads spinning. Fortunately, your clients do not need to know the ins and outs of each option—that’s why your expertise is so invaluable. By familiarizing yourself with the benefits of each accounting method and the eligibility rules, you can make recommendations to your clients that could end up significantly lowering their tax bill.
To continue your own education on tax strategies for real estate investments, begin your training as a Certified Tax Planner today.
