When it comes to maximizing your real estate investments, forming a clear tax strategy is a key step. For many taxpayers, the first thing that comes to mind is researching possible tax credits and deductions. But did you know that even choosing an accounting method can function as a tax strategy? Even if you have already purchased an investment property and placed it in a business entity, you can often still change your accounting method to ensure you are receiving every tax advantage available to you.
How do you determine which accounting method is best for your business? The fundamental question to ask is: when is income recognized? This is the main change your accounting method will bring about—not just how the books look but when you have to pay tax and how much profit you actually get to keep. Today we’ll discuss the main four steps to using a change in accounting method as a tax strategy.
The Four Accounting Methods
Every tax method choice comes down to this equation:
Timing + Tax Rate + Cash Flow = Total Tax Efficiency
In other words, we want to pay attention to our current tax rate and income needs, but we also want to project into the future and try to determine what our tax rate and income needs will be later. By painting as full a picture as possible, we can determine when it makes sense to recognize that income because the tax rate is comparatively lower or when we may need to prioritize increasing our cash flow instead.
For real estate holdings, there are four main accounting methods to consider—keeping in mind that the government may restrict which methods are available to your particular business:
• Cash method
• Accrual method
• Percentage of completion method (PCM)
• Completed contract method (CCM)
Cash
Now most small developers will use the cash method, which is the simplest to understand: We pay tax only when cash is received. Similarly, we deduct expenses only when cash is paid. So anytime money enters or exits your business’s bank account, you recognize those income or expenses from a tax perspective.
The cash method is allowed for small businesses and tends to be a popular method because it feels very straightforward. Your actual cash flow matches your books. For 2025, the IRS defines a small business as one with average gross receipts of $31 million per year or less.
Accrual
Under the accrual method, income is recognized when it is earned, not when you receive the cash. What counts as “earned” income? For real estate developers in particular, this is tied to the “all events” test and the “economic performance” rules:
• The all events test says that income must be recognized when:
o All events have happened that “fix” the right to receive that income
o The amount of that income can be determined with reasonable accuracy
• The economic performance rules say that a taxpayer can deduct a liability or expense when the services or property are actually provided.
Meeting the all events test is more straightforward than it sounds. This can happen when a property’s title passes to the new owner. This can also happen when the new owner takes possession of the property and assumes the benefits and burdens of ownership. Looking at these examples, you can see how the accrual method can create cash flow issues. Once ownership of the property has been transferred, you as the seller must recognize all of the income for that project, even though you have not actually received the cash yet. This is sometimes known as “phantom income” and can make managing your business’ finances a complicated process.
The economic performance rules are in place to prevent a taxpayer from prematurely deducting expenses. One example is rent payments—a developer cannot deduct future rent payments in the current year. Another example is the debt that might arise when a property needs maintenance or repairs. Those expenses cannot be deducted until those services are provided.
Percentage of Completion
What if you are working with a contractor to develop land, and you’re operating under a long-term contract? Now you get to deal with special rules for long-term contracts, which also means additional accounting method options. The first we’ll discuss here is the percentage of completion method (PCM).
Under the percentage of completion method, you must recognize income as the work progresses. So you will need to run new income calculations each year using this formula:
Costs To-Date ÷ Total Estimated Costs for the Project
PCM also has economic performance rules, but they are different from the rules for the accrual method. Because of the special long-term contract rules, you can actually deduct some of expenses even though you have not performed the full contract yet. Similarly, you can do progress billings along the way—incremental payments that occur before the project is 100% complete. This can create more steady cash flow for your business, avoid the problem of phantom income, and spread out the tax liability in smaller chunks over time.
Completed Contract
Lastly, we have the completed contract method (CCM). Just as the name suggests, with CCM income is taxed when the project is completed. In this case, you have usually reached the point where 95% or more of the costs have been incurred, and the buyer’s obligation is fixed.
This method does leave us with a question: what is considered a completed contract? If you are developing multiple homes on a tract of land, is the contract complete when each home sells or when the entire development is completed? The key with this accounting method is to be strategic when you write out the contract. Consider how you can best time the income so that your cash flow meets your needs but you are not stuck with a big tax bill without the funds to pay it.
CCM also shares two benefits with PCM: you can do progress billings, and phantom income is not typically a problem.
Which Methods Are You Eligible For?
After orienting yourself to the differences between accounting methods, you will need to determine which options you are actually eligible to use. This is where the changes made by the “One Big Beautiful Bill” Act (OBBBA) come into play. In the past, most developers were required to use the percentage of completion method. The exception was small businesses and home construction contracts with less than four dwelling units—both could use the completed contract method. A small business is defined under IRC §448 as a business with average gross receipts under $31 million (for 2025). As long as this business is not a tax shelter, you are eligible for the completed contract method of accounting.
Under OBBBA, for any residential construction contracts entered into after July 1st, 2025, developers can now use the completed contract method. This applies to condos, subdivisions, subdivision, and multifamily projects. These builders can elect to use the completed contract method and avoid recognizing the costs or the income until that project is deemed complete.
Summary
Choosing the right accounting method can serve as an unexpected tax strategy. If multiple options are available to your business, consider how the timing of income recognition and expense deductions will impact your business. By doing your research and working with an expert, you can make sure your chosen accounting method translates to the biggest possible tax savings. Talk to a Certified Tax Planner today.
