The New Rules for Residential Construction Contracts: What’s Changed?

The passage of the 2025 Act (formerly referred to as the One Big Beautiful Bill) has brought significant changes to the tax treatment of residential construction contracts. These changes, effective for contracts entered into in tax years beginning after July 4, 2025, are designed to provide greater flexibility and potential tax deferral opportunities for contractors, especially those working on larger residential projects. Below, we outline the new rules.

Broader Definition of Residential Construction Contract

A residential construction contract is now defined as any contract where at least 80% of the estimated total contract costs are reasonably expected to be attributable to the construction, reconstruction, or rehabilitation of dwelling units (with no limit on the number of units per building) and related site improvements.

Expanded Exemption from Percentage-of-Completion Method (PCM)

Previously, only “home construction contracts” (contracts where 80% or more of the costs were for buildings with four or fewer dwelling units) were exempt from the PCM requirement. The 2025 Act expands this exemption to all “residential construction contracts,” regardless of the number of units per building. This means that contracts for large apartment complexes, and similar projects now qualify for the exemption, not just single-family homes or small multi-unit buildings.

Elimination of the 70/30 Hybrid Method

The old requirement for residential construction contracts (not home construction contracts) to use a 70/30 hybrid method (70% PCM, 30% taxpayer’s normal method) is eliminated for new contracts. Now, these contracts are fully exempt from PCM.

Look-back Rule Exemption

The look-back method, which required recalculating taxable income when actual contract costs differed from estimates, no longer applies to residential construction contracts entered into in tax years beginning after July 4, 2025. Previously, this exemption only applied to home construction contracts.

AMT Alignment

The alternative minimum tax (AMT) PCM exemption is now expanded to include residential construction contracts, aligning AMT treatment with regular tax treatment for these contracts.

The 2025 Act’s changes to residential construction contract rules provide broader exemptions, more flexible accounting method options, and greater tax planning opportunities for contractors in the residential construction industry. Contractors should review their contract portfolios and accounting policies to take full advantage of these new provisions.