Builder Confidence Slumps — Tax Moves Homebuilders Should Make Now

Builder confidence is slipping — make these tax moves now to protect cash and preserve value

If orders slow, margins compress, or lenders tighten, your tax strategy becomes a frontline defense. A sudden drop in homebuilder confidence in early 2026 means more closings delayed, more deposits under negotiation, and the real risk of higher carrying costs and unexpected tax bills. The right mix of accounting elections, accelerated deductions, credits and timing of capital expenses can preserve liquidity, produce tax refunds or defer tax liabilities — but only if you act deliberately and document everything.

Why the decline in confidence changes the tax playbook in 2026

Economic softening reported by the National Association of Home Builders in January 2026 and rising financing costs through late 2025 have created a tighter market for many builders and developers. When revenue growth stalls, tax planning shifts from long-term optimization to short-term cash management and downside protection. Specifically:

• Cash flow becomes king: Timing deductions, deferrals and credits that create immediate tax cash refunds or lower quarterly estimated payments matter more than ever.
• Inventory and contract accounting choices affect when income is taxed and when costs are capitalized — altering current-year taxable income quickly.
• Depreciation and expensing elections (cost segregation, bonus depreciation, Section 179) can produce large first-year deductions in years you want to reduce taxable income.
• Tax credits for energy and rehab are increasingly structured to be transferable or refundable in certain situations — turning tax attributes into immediate cash value for builders.

High-level checklist — immediate actions for builders

• Review inventory accounting and long-contract accounting elections now (change via Form 3115 if advantageous).
• Run cost segregation studies on recent completions and existing rental/office assets to accelerate depreciation.
• Audit your 2024–2026 capital spending cadence: accelerate or delay purchases to maximize bonus depreciation and Section 179 benefits.
• Identify and substantiate energy-efficiency credits (45L, 179D, IRA-related credits) and consider monetization options where allowed.
• Model NOL creation and use: consider electing carrybacks where available, and preserve state conformity value.
• Document deferred revenue and deposits: coordinate tax and GAAP positions to manage timing mismatch risk.
• Perform a state conformity review: many states do not follow federal bonus depreciation or have different rules for inventory capitalization.

Inventory accounting elections: lock in the most favorable timing

Inventory treatment defines when costs become deductible through cost of goods sold and when revenue is recognized — a pivotal issue for builders with pre-sales, model homes and spec inventories. Two practical, high-impact moves:

1. Re-evaluate long-contract accounting (Section 460) vs. completed-contract

For many homebuilders, long-term contract rules require the percentage-of-completion method for tax reporting, which recognizes income as work progresses. In a slowing market, percentage-of-completion may accelerate taxable income relative to cash collections. If you qualify for small-contract exceptions or other safe harbors, switching to a completed-contract method (or revising % completion drivers) can defer recognition until closings.

Action: Run a scenario comparing taxable income under percentage-of-completion vs. completed-contract for current projects. If a change is materially beneficial, prepare documentation and a Form 3115 request in consultation with counsel. Timing is critical — many method changes require advance planning and specific filing positions.

2. Use the uniform capitalization (UNICAP) rules and de minimis safe harbors to manage capitalization vs expense

Under IRC Section 263A (UNICAP), many indirect costs for production or resale (like construction overhead and borrowing costs) must be capitalized into inventory. However, the Tangible Property Regulations provide de minimis expensing safe harbors and a small taxpayer safe harbor for building improvements where capitalization may be waived if your gross receipts or building basis falls under thresholds.

Action: Reconcile your most material indirect costs against UNICAP rules and the de minimis safe harbor. For smaller builders, electing and documenting a small taxpayer safe harbor can free up immediate deductions and improve near-term cash flow.

Cost segregation: convert slow sales into near-term tax relief

When closings slow, finished inventory or owned rental models are sitting on your balance sheet. Cost segregation reclassifies components of buildings and improvements from 39-year (commercial) or 27.5-year (residential rental) property into 5-, 7-, or 15-year categories — generating accelerated depreciation deductions.

Why do this in 2026? The current tax code still allows bonus depreciation (phasing down under TCJA schedule) and accelerated depreciation that — when combined with cost segregation — can produce substantial immediate deductions. For property placed in service in 2026, bonus depreciation is limited to 20% under the TCJA phase-down. That makes the selection of which assets to place in service in 2025 vs 2026 an important optimization.

Action: Commission qualified cost segregation studies on model homes, office buildings, and rental properties placed in service in the last 3 years. Recast previously capitalized construction-in-progress to maximize short-life asset classifications and generate catch-up depreciation (Form 3115 accounting method change may be available to realize these benefits in the current year).

Documentation tip: Maintain engineering-level backup and a signed cost segregation report — these are the primary items auditors request. Expect state conformity issues; determine if your state requires add-backs for federal bonus depreciation.

Timing capital expenditures: accelerate, defer, or stage purchases

Deciding whether to accelerate or defer capital spending is now a tactical decision tied to the bonus depreciation phase-down, Section 179 limits, liquidity needs and projected taxable income.

Key considerations

• Bonus depreciation phase-down: With federal bonus depreciation scheduled at 20% for property placed in service in 2026, accelerating qualifying property into 2025 (if you can place in service before year-end) could increase immediate write-offs.
• Section 179: Section 179 expensing remains a tool for smaller builders — but it has annual limits and is subject to taxable income limitations. If taxable income is falling, Section 179 may be less valuable than bonus depreciation but still useful when combined with other measures.
• Cash vs tax trade-offs: Buying into a slow market may strengthen your asset base but could worsen year-end liquidity. Model purchases to show the net cash benefit after tax savings and required down-payments.

Example scenario

Builder A has $2M in planned capital improvements to model homes. If placed in service in 2025, a larger portion may qualify for 2025 bonus depreciation (higher percentage than 2026). Accelerating $2M into 2025 could produce an additional $400k–$800k of first-year deductions compared with placing the same assets in service in 2026 — materially lowering 2025 tax and improving near-term cash flow. Run the math under both federal and state rules before committing, and account for recapture risk on future sales.

Tax credits: convert investment into cash or lower tax bills

Energy and renovation credits have increased in importance for builders in 2024–2026 as federal policy pushed toward decarbonization and energy efficiency. These credits may provide direct dollar offsets or, in some cases, be transferred or sold.

Credits to prioritize

• Section 45L — Energy-efficient home credit: Potentially worth thousands per qualifying unit. Ensure certified testing and third-party verification; track documentation per unit.
• Section 179D — Commercial building energy deduction: For builders of commercial or common-area systems in multi-family projects, this can produce valuable deduction and, for some owners, a credit-like result through incentive structures.
• IRA-era clean energy incentives and transferability: Credits created or expanded under the Inflation Reduction Act have mechanisms for transfer or direct-pay in limited circumstances. If your company does not have taxable capacity, monetization can be critical to realizing value.

Action: Inventory projects and units for credit eligibility now. Engage engineers and certification bodies early — many credits require pre-construction or contemporaneous documentation and on-site testing.

Deferred revenue, deposits, and contract receipts — tax recognition risk

Builders often receive earnest money, construction deposits, and pre-sales proceeds that create timing differences between cash and tax. In a slowing market, these items can change hands, be refunded under contingency clauses, or trigger disputes — all of which affect when income should be recognized for tax.

Action: Coordinate with your tax advisor to determine proper treatment of prepayments under current IRS guidance. Cash-method taxpayers may use certain deferral rules for advance payments; accrual-method taxpayers must align revenue recognition with contract performance and risk transfer under Section 451 and Section 460. Consider escrow structures that preserve tax favorable timing when closings are uncertain.

NOL planning: turn losses into strategic assets

A downturn often produces net operating losses. Properly managed, NOLs are a powerful tool — they can generate refunds (if carryback is available) or shelter future income. Key 2026 considerations:

• Federal carrybacks and carryforwards: Review whether recent or current-year NOLs are eligible to be carried back under any special rules and whether carrying back produces an immediate refund.
• State NOL rules: Many states limit or disallow federal NOL treatment differences — plan state NOL usage separately.
• Attribute management: Be mindful of built-in gains, capital loss carryovers, and tax credit interaction; an NOL may reduce taxable income but affect the utilization of other attributes.

Action: Model NOL creation and utilization under multiple federal/state scenarios. If electing an early carryback or foregoing a carryback, document the strategic rationale — elections have timing and irrevocability considerations.

Preserve audit defensibility: documentation and study selection

When you accelerate deductions or change accounting methods, you raise the audit profile. Minimize risk:

• Use qualified providers for cost segregation studies and preserve engineering backups and cost detail.
• Maintain contemporaneous records for energy credit certifications and third-party testing reports.
• Document the business reason for accounting changes and keep all Form 3115 support and IRS correspondence copies.
• For multi-state operations, maintain a state tax compliance file that reconciles taxable income adjustments and addbacks required by each state.

What changed in late 2025 and why it matters in 2026

Several trends in late 2025 and early 2026 should shape your planning:

• Bonus depreciation phase-down: The scheduled reduction of bonus depreciation percentages means the window for maximum first-year write-offs is closing. Plan the placement-in-service date of significant assets accordingly.
• Greater IRS enforcement and audit focus: Increased enforcement resources have expanded audit selection for large and mid-sized businesses; transactions producing large, concentrated deductions attract scrutiny.
• Increased energy credit monetization options: Regulatory guidance in late 2024–2025 clarified certain transferability rules for clean-energy credits, creating near-term cash options for builders without tax capacity. See our note on credit monetization.
• State-level divergence: States continue to diverge on conformity to federal depreciation and NOL rules — a growing headache for multi-state builders.

Practical playbook — month-by-month actions for the next 90 days

1. Week 1–2: Convene finance, construction and tax leaders. Run sensitivity models for 2026 cash flow under multiple tax strategies (accelerate purchases, cost segregation, accounting method changes).
2. Week 3–4: Order cost segregation studies for eligible properties and begin energy credit audits for units under construction. Prioritize projects that can be placed in service before year-end if bonus depreciation gains are material.
3. Month 2: If switching inventory or contract accounting methods, prepare a Form 3115 strategy and assemble backup. Start implementing improved documentation controls for deferred revenue and deposits.
4. Month 3: Complete modeling for NOL use or carryback elections; consult with state advisors to lock in state-specific strategies. Finalize decisions on whether to accelerate capital expenditures into 2025 or defer to preserve liquidity.

Practical reminder: Tax optimization without proper documentation or qualified studies is the fastest way to invite audit adjustments. Every aggressive step should be defensible with contemporaneous support.

Common pitfalls to avoid

• Assuming federal rules automatically apply at the state level — many states disallow or add back bonus depreciation and accelerated deductions.
• Relying on preliminary or low-quality cost segregation studies — use firms that will defend studies before the IRS.
• Missing the mechanics and deadlines for accounting method changes (Form 3115) — improper filings can delay benefits for years.
• Failing to tie energy credit certifications to construction timelines and testing — credits can be denied for inadequate substantiation.

Case study: How one mid-sized regional builder protected cash in 2026

Midland Homes (hypothetical) faced a 20% slowdown in closings in Q4 2025. They implemented a multi-pronged tax response in December 2025:

• Commissioned cost segregation studies on two recently completed model complexes and accelerated $1.2M in short-life asset classifications, generating $450k of catch-up depreciation in 2025 via an accounting method adjustment.
• Identified 60 spec units that qualified for the Section 45L credit; engaged an energy rater and secured certification to monetize credits in mid-2026.
• Re-timed $3M of discretionary lot improvements from early 2026 back into Q4 2025, capturing a materially higher bonus depreciation percentage.
• Filed the necessary Form 3115 to change a contract accounting method on two projects, deferring a portion of taxable income until closings resumed.

Outcome: Midland reduced 2025 federal tax by an amount that funded 60% of their Q1 2026 payroll while preserving working capital for strategic pricing concessions to keep closings moving.

How to start — a simple diagnostic for builders and developers

1. List all projects expected to close in the next 24 months and identify which are spec, build-to-order, or rental.
2. Tag projects with potential energy credits or significant eligible short-life assets (HVAC, interior finishes, site improvements).
3. Run a high-level tax cash flow model showing the effect of: (a) cost segregation now, (b) accelerating capital spend into 2025, (c) making an accounting method change, and (d) monetizing available credits.
4. Engage a specialized construction tax advisor to vet studies, prepare Form 3115s and review state conformity impacts.

Final considerations: timing, documentation, and counsel

Declining builder confidence is a call to act — not to panic. Smart, documented tax moves can create working capital, produce refunds, and give you optionality as the market evolves. But the decisions are technical and often irreversible. Prioritize:

• Speed with discipline: Act fast but with full backup and professional studies.
• Multistate thinking: Model federal and state impacts together — sometimes an elective federal benefit is a state tax trap.
• Audit defensibility: Keep contemporaneous records for cost segregation, energy credits and method changes.

Put this into motion — next steps

If your closing pipeline looks weaker, don’t leave potential tax relief on the table. Start with a 60–90 minute diagnostic: we’ll review your projects, run quick models for inventory and timing elections, and prioritize actions that deliver the fastest cash benefit. Early 2026 is the window to arrest margin compression with tax moves that are legal, documented and defensible.

Contact our construction tax team today to schedule a diagnostic and get an action plan you can implement in 30–90 days.

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