America’s housing‑affordability crisis stems largely from a chronic shortage of new homes. The tax code compounds the problem by treating the construction of rental apartments as a long‑term capital expense, forcing developers to spread deductions over 27.5 years and reducing the present‑value benefit to roughly 50 cents on the dollar.
How the current tax treatment works
- Developers of new multifamily buildings must depreciate the structure over 27.5 years.
- The resulting deduction is worth about 56 % of the cost in present‑value terms, meaning developers effectively pay tax on income that does not exist.
- By contrast, equipment purchases can be deducted immediately, a “pro‑growth” treatment that was recently made permanent.
The Rental Housing Investment Act (RHIA)
- Proposed by Sen. Lisa Blunt Rochester (D‑DE) in March 2026 with a bipartisan House companion introduced in May 2026.
- Allows developers of new rental housing (≥ 2 units) to deduct up to $150,000 per unit immediately, instead of depreciating over 27.5 years.
- For projects that meet affordability criteria derived from the Low‑Income Housing Tax Credit, the immediate deduction limit rises to $250,000 per unit.
- The deduction applies only to property whose “original use … commences with the taxpayer,” excluding existing buildings.
Why expensing matters more than broad subsidies
- Most housing‑related tax incentives—first‑time‑homebuyer credits, tax‑preferred home‑purchase accounts, and rental‑assistance programs—apply to both new and existing homes.
- Existing‑home sales outnumber new‑home sales by roughly 6 to 1; consequently, about six‑sevenths of the dollars spent on these programs benefit existing stock.
- By targeting only new construction, RHIA directs nearly every dollar of forgone revenue to the building of fresh rental units.
Illustrative impact: Austin vs. San Diego
| Metro area | Total homes (≈) | Annual home sales | New multifamily permits per year |
|---|---|---|---|
| Austin, TX | 1.13 million | ~36,000 | 20,100 |
| San Diego, CA | 1.27 million | ~32,000 | 6,800 |
- Both metros receive comparable subsidies for home purchases (≈ $300–$400 million each).
- Assuming the $150,000‑per‑unit cap binds and full take‑up, Austin would gain about $353 million per year, while San Diego would gain about $120 million—a three‑fold difference that mirrors the three‑fold disparity in new multifamily construction.
Share of tax relief that reaches new homes
| Policy type | Approximate share of forgone revenue that benefits newly built homes |
|---|---|
| Property‑tax relief / broad rental assistance | ~1 % |
| Home‑buyer credits or purchase‑savings accounts | ~15 % (≈ 1 in 7 sales is new) |
| Full expensing without an original‑use test | ~50 % (investors spend as much on existing apartments as builders do on new units) |
| RHIA (original‑use test) | ≥ 93 % (the remainder mainly from teardown‑rebuild projects) |
| Incremental‑units test (only units added beyond existing parcel) | ≈ 100 % |
These estimates assume no behavioral response; removing the original‑use restriction would likely increase “churning,” where owners trade existing buildings to capture immediate deductions, further diluting the benefit to new construction.
Fiscal impact
- Full expensing of all structures would add $537 billion to the primary deficit over ten years on a conventional basis.
- Dynamic modeling suggests the same change would reduce primary deficits by $434 billion because of the strong pro‑growth effect.
- RHIA‑style residential expensing, as a subset of full‑structure expensing, would exhibit a similarly large gap between conventional and dynamic revenue estimates, indicating that the policy is cheaper than it appears when growth effects are considered.
Policy implications
- Federal tax reform cannot alone compel local jurisdictions—such as San Diego—to relax zoning or upzone, but it can remove the federal tax penalty that discourages developers from building new rental housing.
- By providing a neutral, targeted tax incentive that applies only to genuinely new construction, RHIA aligns tax policy with the goal of expanding the housing supply without granting windfalls to owners of existing properties.
In sum, expensing new rental housing through mechanisms like the Rental Housing Investment Act offers a focused, fiscally efficient tool to boost the construction of much‑needed rental units and address the supply side of America’s housing‑affordability challenge.
Source article: taxfoundation.org
