Housing affordability is a primary driver of the rising cost of living in the U.S. While increasing supply is the only long-term solution, many popular tax proposals—such as first-time homebuyer credits or new savings accounts—actually worsen the problem by boosting demand and driving prices even higher.
The most effective federal lever to fix the housing shortage isn’t a subsidy; it is expensing for residential structures.
The Problem: The “Tax Penalty” on Building
Currently, federal law requires developers to spread tax deductions for rental housing investments over 27.5 years. Because a dollar today is worth more than a dollar in three decades (due to inflation and the time value of money), this delay acts as a massive tax penalty on new construction.
Expensing would allow developers to deduct the cost of building new housing immediately, removing the financial friction that prevents many projects from breaking after-tax profitability.
Lessons from History: The 1980s Boom and Bust
History proves that the speed of “cost recovery” (how fast a builder can write off expenses) dictates how much housing gets built.
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The 1981 Boom: The Economic Recovery Tax Act slashed the recovery period for residential buildings from 31 years to 15 years. The result? A massive surge in multifamily housing construction.
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The 1986 Collapse: The Tax Reform Act of 1986 pushed the period back to 27.5 years and mandated slower “straight-line” depreciation. Multifamily construction cratered and has never fully recovered to its pre-1986 levels.
Modern Solutions: Beyond the Status Quo
Economists and policymakers are exploring several ways to modernize how we tax residential investment. These range from “full expensing” to more targeted “incremental” improvements.
1. Neutral Cost Recovery (NCRS)
Under NCRS, deductions remain spread over 27.5 years, but they are adjusted for inflation. This is economically equivalent to full expensing because it ensures the builder isn’t “taxed” by the eroding value of money over time. Research suggests this could lead to 2.33 million new housing units in the long run.
2. Per-Unit Caps
A proposed policy (recently introduced by Sen. Lisa Blunt Rochester) would allow immediate expensing for up to $150,000 per unit.
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The Benefit: This provides full relief for entry-level, market-rate apartments while limiting the tax break for luxury developments.
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Efficiency: This method is estimated to cost between $200k–$250k per new unit, roughly four times more efficient than the Low-Income Housing Tax Credit (LIHTC).
3. Solving the “Loss Position”
If a company builds so much that its deductions exceed their income, it might not benefit from the tax break. Policymakers have several tools to fix this:
| Policy Option | How it Works | Impact |
| Transferability | Allows builders to sell their tax deductions to other profitable entities. | Equivalent to full expensing. |
| Shorter Asset Lives | Reduces the write-off period from 27.5 years to 15 or 20 years. | Significant improvement. |
| Investment Tax Credit | Provides a flat 10% credit for construction costs. | Near parity with current tax penalties. |
The Path Forward
The idea of using tax policy to spur housing is gaining bipartisan steam. From the CREATE JOBS Act (Sen. Ted Cruz) to the Rental Housing Investment Act (Sen. Lisa Blunt Rochester), there is a growing consensus that the tax code is currently a barrier to construction.
If federal leaders want to make a dent in the housing crisis, they must stop subsidizing demand and start removing the tax penalties that keep hammers from swinging.