New safe harbor method of accounting for real estate developers

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The IRS recently released Revenue Procedure (Rev. Proc.) 2023-9, which is effective for taxable years beginning after Dec. 31, 2022. Rev. Proc. 2023-9 makes obsolete Rev. Proc. 92-29 and, per the guidance, “provides new rules and conditions for implementing the optional safe harbor method of accounting for real estate developers to determine when common improvement costs may be included in the basis of individual units of real property in a real property development project held for sale to determine the gain or loss from sales of those units.” In issuing the Rev. Proc. 2023-9, the IRS acknowledged that the Internal Revenue Service Restructuring and Reform Act of 1998 and the Bipartisan Budget Act of 2015 both resulted in various aspects of Rev. Proc. 92-29 becoming outdated. The IRS further acknowledged that Rev. Proc. 92-29 placed undue administrative burdens on developers and the IRS, and that the application of the 92-29 alternative cost method to contracts accounted for under IRC § 460 may be unclear.

In order to meet the requirements to use the alternative cost method under Rev. Proc. 92-29, developers were required to extend the statute of limitations on the return for the year in which the alternative cost method was being used by filing Form 921, Consent to Extend the Time to Assess Income Tax, or Form 921-A, Consent Fixing Period of Limitation On Assessment of Income and Profits Tax, as applicable. An additional requirement under Rev. Proc. 92-29 mandated that developers file annual statements with the District Director for each project for which the 92-29 alternative cost method was used. Rev. Proc. 2023-9 removes both requirements for developers who wish to use the Alternative Cost Method provided for within the guidance of Rev. Proc. 2023-9.

Rev. Proc. 2023-9 provides guidance on:

  • How to apply the Alternative Cost Method for developers using the accrual method of accounting and the completed contract method of accounting
  • How to allocate the estimated cost of common improvements across benefited units in a qualifying project
  • How to calculate the alternative cost limitation

The guidance also provides definitions for what constitutes a qualifying project, a common improvement, and defines the CCM method under the Revenue Procedure.

The IRS has deemed the Alternative Cost Method under Rev. Proc. 2023-9 to be a method of accounting under IRC § 446 and, as such, a change to use the new method is considered a change in accounting method under §§ 446(e) and 481. For those taxpayers electing to file a change in accounting method for the first taxable year beginning after Dec. 31, 2022, a short Form 3115 may be used in lieu of the standard Form 3115. Under the rules provided in the guidance, the term “short Form 3115” means the following sections of Form 3115 must be completed:

  • The identification section of page 1 (above part 1)
  • The signature section at the bottom of page 1
  • Part I, line 1(a)
  • For taxpayers using the legacy rule (see Section 8.02(2)(b) of 2023-9), Part II, line 16(a) identifying any qualifying projects in progress for which the taxpayer used the 92-29 alternative cost method and any qualifying projects in progress for which taxpayer will continue to use an accrual method of accounting

Real estate developers using the accrual method of accounting and the completed contract method of accounting should consider and evaluate adoption of the Alternative Cost Method, as it may result in a more favorable (accelerated) inclusion of allocable estimated common improvement costs in the basis of sold and substantially completed units, compared to the inclusion of such costs under the general application of section 461(h) economic performance rules.

Please reach out to National Tax if you have any questions regarding Revenue Procedure 2023-9 or have any clients that may benefit from a change in accounting method to use the new Alternative Cost Method under the guidance.


Travis Butler, Director, National Tax


Tim Morrison, Manager, National Tax


Eric Green, Partner, Co-Leader, REIT Tax Practice


Rich Shevak, Principal, National Tax



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