Homebuilder status.

• Author: Reilly, Kevin F.
• Position: Special Industries

Obtaining homebuilder status has long been the goal of many construction contractors. A homebuilder's home construction contracts are exempt from the long-term contract provisions of Sec. 460 and so are not subject to the percentage of completion method for regular tax or AMT purposes or to the lookback rules for either regular tax or AMT purposes. Further, a home construction contract is exempt from the cost allocation rules of Sec. 460, although Sec. 263A cost capitalization rules apply to large homebuilders. However, there are clear limitations on what a home construction contract is, and these exclude real estate developers and condominium builders from being considered homebuilders.

Under Sec. 460(e)(6)(A), a home construction contract is any construction contract where 80% or more of the estimated total contract costs are reasonably expected to be attributable to the building, construction, reconstruction, or rehabilitation of:

1. Dwelling units in buildings containing four or fewer dwelling units, and

2. Improvements to real property directly related to the dwelling units and located on the site of the dwelling units.

Townhouses and row houses are treated as separate buildings for purposes of this definition. Excluded from the definition of a dwelling unit are units in a hotel, motel, or other establishment more than one-half the units in which are used on a transient basis (Sec. 168(e)(2)(A)(ii)(I)).

The Service has issued Prop. Regs. Sec. 1.460-3(b)(2)(ii), which greatly expands the definition of homebuilder and, when finalized, will provide relief to a number of taxpayers (REG-120844-07). The proposed regulations provide that long-term contracts for land improvements directly related to and located on the site of the dwelling units and common improvements at the site are treated as home construction contracts, even if there is no home construction involved. Thus, under the proposed regulations, a land developer that is selling individual lots (and its contractors and subcontractors) may have long-term construction contracts that qualify for the home construction contract exemption. An allocable share of the common improvements must be included in the cost of the dwelling or land.

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For purposes of the proposed regulations, a common improvement is one that the taxpayer is contractually obligated, or required by law, to construct within the tract or tracts of land containing the dwelling units or the land on...