When a real estate developer constructs multiple residential units to be held for sale as part of a single project, the developer is often legally or contractually required to construct certain common improvements, such as roads, sidewalks, sewer lines, and amenities.  The construction of these improvements is often not complete by the time the developer begins to sell the units.

For income tax purposes, a developer can generally allocate the costs of these common improvements to the tax basis of the individual units, which will reduce the developer’s gain when the units are sold.  However, an accrual-basis taxpayer generally cannot include costs in basis until those costs have actually been incurred.  Thus, if not all of the costs of the common improvements have been incurred by the time the developer begins to sell the units, the developer may have to recognize too much taxable income from such sales.