America’s ongoing housing affordability crisis is fundamentally a crisis of insufficient supply. Across the political spectrum, housing analysts, policy researchers, and economists—including experts from the American Enterprise Institute and the Center for American Progress—agree that the United States needs millions of new housing units. Building this new inventory is essential to achieving critical national housing goals, which include returning vacancy and household formation rates to historical norms, relieving severe overcrowding, and ultimately restoring long-term housing affordability for everyday Americans.
Yet, a major structural roadblock to solving this shortage is embedded within the federal tax code itself. While the tax system famously encourages homeownership through various deductions and preferences, it simultaneously penalizes the development and construction of housing for renters. One straightforward, economically pro-growth solution to offset this persistent tax penalty is allowing immediate business expensing for newly constructed residential structures.
Under current federal tax rules, a business that purchases machinery, equipment, or other standard capital assets can typically deduct the full cost immediately—a pro-growth policy approach that was recently made permanent. By contrast, a real estate developer who invests capital to build a new apartment building cannot deduct these substantial costs right away. Instead, federal tax regulations require developers to spread their deductions sluggishly over a period of 27.5 years.
This protracted depreciation schedule aggressively drives down the present value of those deductions to roughly 50 cents on the dollar. Consequently, a multifamily housing developer is effectively forced to pay federal taxes on business income that does not actually exist in real terms. This creates a severe structural tax penalty on multifamily residential projects. Many critically needed housing developments that would otherwise pencil out financially and move forward never happen at all. As a result, the national housing stock remains smaller, and the entire country bears the economic cost.
The Rental Housing Investment Act and Targeted Tax Relief
Policymakers have various legislative options at their disposal to counter this tax penalty, but these approaches differ dramatically in how much of the forgone federal revenue actually translates into new physical construction.
To address this challenge, lawmakers introduced the Rental Housing Investment Act (RHIA). The legislation was introduced in the Senate by Sen. Lisa Blunt Rochester (D-DE) in March, followed by a bipartisan companion bill introduced in the House in May.
The RHIA would fundamentally alter the tax treatment for multifamily development by allowing developers of new rental housing—specifically buildings containing two or more units—to immediately deduct up to $150,000 per unit, rather than forcing them to slowly depreciate those capital costs over 27.5 years. Furthermore, the legislation increases this immediate deduction cap to up to $250,000 per unit for residential projects that successfully meet specific affordability criteria borrowed from the established Low-Income Housing Tax Credit program.
This legislative proposal represents a robust, meaningful step toward full expensing, a sound economic approach that ensures the tax code does not artificially distort private investment decisions. Moreover, under this specific design, nearly every single dollar of forgone federal tax revenue would directly support the creation of new housing units rather than being absorbed by existing properties.
Fix the Tax Code for New Capital, or for All Capital?
Standard economic research demonstrates that full expensing spurs significantly more new investment per dollar of tax revenue than a broad corporate rate cut. This is because the benefits of expensing reach exclusively new capital investments, whereas a corporate tax rate cut also bestows a windfall benefit on old capital that was already built and paid for.
Unfortunately, nearly every popular government housing program functions more like a rate cut because it benefits both new and old housing stock equally. Proposed first-time homebuyer tax credits, tax-preferred home purchase savings accounts, and expanded rental assistance programs all help individuals pay for housing regardless of whether that housing was constructed last month or fifty years ago.
The financial resources spent on these programs—or, equivalently, the federal tax dollars forgone—are spread thinly across the entire existing housing market. For example, in the case of government subsidies and incentives directed toward home purchases, existing home sales dramatically outnumber new home sales by roughly six to one. Consequently, about six out of every seven taxpayer dollars deployed in these programs are simply used to bid on existing, pre-owned homes rather than creating new supply. Similarly, cheap credit supported by monetary policy or government-sponsored enterprises does not discriminate between new construction and the legacy housing stock.
Under the RHIA proposal, however, neutral tax treatment is strictly limited to property whose original use commences with the taxpayer, ensuring that existing buildings remain entirely ineligible. While bonus expensing for machinery and equipment typically requires no original use restriction, that restriction is vital for real estate and buildings.
To illustrate the scale, investors spent approximately $166 billion purchasing large, existing apartment properties—roughly 45 percent more than the $115 billion spent nationwide on building brand-new multifamily housing. If lawmakers permitted the tax deduction to be claimed on previously owned, purchased property, it could easily double the total federal revenue cost while failing to provide any additional economic incentive for new construction at the margin.
Furthermore, original use expensing protects taxpayers from subsidizing regions where local regulatory barriers and zoning laws block new building. At the margin, a municipality that permits more housing construction naturally attracts more of this favorable tax treatment, creating a powerful local economic incentive that pushes in favor of upzoning and cutting red tape.
Build Three Times as Much, Get Three Times the Tax Relief
To understand how this dynamic plays out geographically, consider the metropolitan areas of Austin, Texas, and San Diego, California. Both metro areas feature a nearly identical total number of homes—approximately 1.13 million in Austin and 1.27 million in San Diego—and experience a similar volume of home sales each year, at roughly 36,000 and 32,000, respectively.
Despite these similarities, Austin permits and constructs roughly three times the volume of new multifamily housing as San Diego, recording about 20,100 new units annually compared to San Diego’s 6,800 units. A standard housing subsidy program that is simply absorbed by the broader existing housing stock or home purchases will spend roughly equivalent amounts of money in both metropolitan areas, regardless of local building activity.
By contrast, tax relief that is strictly targeted to benefit new construction directly rewards Austin for its pro-housing policies and willingness to build. Assuming standard economic parameters and no behavioral changes, a $10,000-per-purchase homebuyer subsidy costs roughly the same—between $300 and $400 million—in each metro area. However, under the RHIA framework, the Austin metro area would benefit by an estimated $353 million per year due to its high volume of new construction, while the San Diego metro area would benefit by only $120 million. Building three times as much housing yields three times the tax relief, transparently demonstrating what the policy is designed to encourage: new construction.
Directing Relief Where It Matters Most
This stark difference in geographic impact scales up directly to national policy. Financial assistance for housing can provide support across three distinct categories: homes that already exist, which total roughly 147 million homes nationwide; homes that trade in real estate markets, amounting to about 4.8 million sales annually including 4.1 million existing homes and 700,000 new homes; or homes that are actually built from the ground up, numbering about 1.5 million new homes a year.
When evaluating how much of the forgone federal revenue actually benefits newly built homes in any given year, the policy design makes all the difference. For broad federal policies targeting existing homes, such as property tax relief or general rental assistance, only about 1 percent of the benefit reaches new homes, reflecting their tiny share of the total housing stock each year.
For policies targeting home purchases, such as buyer tax credits or purchase savings accounts, the share rises to about 15 percent, given that roughly one in seven home sales involves a new construction property. For general expensing rules without an original use test, the share climbs to about half, as investors spend at least as much annually purchasing existing apartment complexes as builders spend constructing new ones.
In contrast, under the RHIA’s specialized expensing framework featuring the original use test, nearly every single federal dollar goes directly to new construction. Analysts estimate that at least 93 percent of the relief reaches newly built units, with the remaining small fraction going toward teardown and rebuild projects, where an older, smaller building is demolished to construct a larger, modern multi-unit development. Implementing an incremental-units test, which would provide neutral tax treatment exclusively for units added beyond those already existing on a parcel, could close even that minor gap.
While these calculations rely on standard economic assumptions and reflect the limitations of available housing data, they underscore a fundamental truth about policy design. Removing the original use test would likely increase market churning as property owners trade existing buildings simply to accelerate their tax deductions, pulling vital financial relief away from new construction and squandering taxpayer dollars on recycled assets.
Expensing as Sound, Pro-Growth Tax Reform
Federal economic analysis demonstrates that enacting full expensing for all structures would add to conventional budget deficits over a ten-year window, but because it ranks among the most economically pro-growth tax policy changes available, it would ultimately reduce primary deficits on a dynamic scoring basis. Targeted residential expensing, as a vital subset of broader capital cost recovery reform, shares this powerful characteristic of generating positive economic feedback.
The national housing affordability crisis is driven primarily by severe supply constraints, and much of the political and regulatory battle is fought at the state and local levels over zoning and land-use decisions. While federal tax policy alone cannot force municipalities like San Diego to reform their local regulations to match the pro-housing environment of Austin, sound federal tax reform can finally stop penalizing the physical act of building new homes. Providing bonus expensing for new rental housing offers the exact economic tool needed to tackle America’s housing shortage at its root.
