Tax Policy to Lower Housing Costs by Expensing Residential Structures

Housing costs are an important and growing driver of the high cost of living. To bring these costs down, there’s no substitute for increasing supply, which is why the US Senate recently passed the ROAD to Housing Act (although a few provisions make its net effect uncertain)).

While the ROAD to Housing Act is not a tax A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. bill, policymakers have been kicking around tax ideas targeting housing affordability. Unfortunately, most of their proposals won’t solve anything. Policies like tax credits for first-time homebuyers, new tax-advantaged savings accounts, or capital gains tax exemptions for home sales to first-time homebuyers would mostly boost demand and provide windfalls to current homeowners.

The one exception: expensing for residential structures, a federal tax policy that would vigorously address the housing supply shortage.

Some Background

The two policy levers lawmakers can use to help expand housing supply are regulatory reform and financing. In some parts of the US, the main constraint on housing supply is zoning and land use regulation. In others, the main constraint is the expected rate of return on new housing construction, which is driven by basic economic factors, including the cost of materials, the cost of labor, interest rates, and taxes. In these places, tax policy can play a role in expanding the housing stock, both driving down rents and the cost of ownership.

Under current law, deductions for investment in rental residential housing must be spread over 27.5 years. In practice, this creates a large tax penalty on residential investment. To eliminate that tax penalty, policymakers could introduce expensing for residential structures, which would allow developers to deduct the cost of building new housing immediately.

History Shows Expensing Is Effective

The effect of expensing and other improvements to cost recovery Cost recovery refers to how the tax system permits businesses to recover the cost of investments through depreciation or amortization. Depreciation and amortization deductions affect taxable income, effective tax rates, and investment decisions. on investment generally is well-documented. But we also have specific evidence for improved cost recovery for residential structures.

In 1981, the Economic Recovery Tax Act shortened the recovery period for residential structures from 31 years to 15 years. A dramatic improvement, and still a dramatic improvement after laws in 1982 and 1983 incrementally raised the asset life to 18 and 19 years, respectively. Housing construction boomed, particularly in multifamily.

The Tax Reform Act of 1986 pulled back these improvements to rental housing. The law raised the asset life to 27.5 years and mandated straight-line depreciation Depreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco (as opposed to more accelerated options like declining balance or sum of years digits). Housing construction collapsed. And the long-run consequence of that decline in housing is higher rents. In fact, multifamily housing construction has still not recovered from the Tax Reform Act of 1986: no year since has had as many multifamily housing starts.

Looking Forward: Estimates and Options

At Tax Foundation, we have looked at two policies: expensing for residential structures (which would allow companies to deduct investment in residential buildings immediately) and neutral cost recovery for residential structures (which would keep deductions spread over time but provide adjustments for inflation Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin and the time value of money, economically equivalent to full expensing Full expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.). Back in 2020, we estimated that introducing neutral cost recovery for residential structures would lead to 2.33 million new housing units in the long run.

A recent Center for American Progress (CAP) report digs deeper into a mix of options that would improve cost recovery for residential structures. It estimates that a policy of giving developers a choice between full expensing and a 10 percent investment tax credit would lead to the construction of almost 1 million new housing units in the next decade. Our estimate based on a long-run timeframe is not strictly comparable to CAP’s estimates based on a 10-year timeline.

CAP also considers several other improvements to cost recovery policy. Some stop short of full expensing but provide a substantial improvement over current law. One of these options is a per-unit cap for expensing deductions of $150,000. In practice, this would provide close to full expensing for entry-level, market-rate apartment buildings, and more limited benefits to luxury buildings. While even new luxury buildings expand the housing stock, a cap would be a relatively efficient way to reduce the policy’s costs without snuffing its incentive effects.

CAP estimates the cost per additional unit of housing stock across the various reform options would be between $200,000 and $250,000—dramatically lower than the cost per unit produced by the low-income housing tax credit, which hovers around $1 million.

One of the challenges with improving cost recovery for structures is that allowing expensing for residential structures might push companies into a loss position, rendering them unable to benefit from the full deduction. There are a few ways around this. The first, as mentioned before, is neutral cost recovery. But several other options, detailed below, would all be a substantial improvement over the status quo.

Table 1. Options for Mitigating the Loss Position Problem by Improving Tax Treatment of Structures

| Option | Description | Economically Equivalent to Expensing or Incremental Improvement |
| --- | --- | --- |
| Neutral Cost Recovery | Costs are still spread over 27.5 years, but deductions are adjusted for inflation and the time value of money. | Equivalent |
| Investment Tax Credit | Either as an optional alternative to expensing or a standalone policy, a 10 percent investment tax credit is available for property subject to the 27.5-year depreciation schedule. | Incremental Improvement* |
| Transferability | Provide expensing and allow entities in loss positions to transfer deductions to other entities with taxable income, analogous to the policy available for certain Inflation Reduction Act green energy credits. | Equivalent** |
| Shorter Asset Lives | Keep straight-line depreciation but shorten residential structures asset life (say, 15 or 20 years) | Incremental Improvement |
| Accelerated Depreciation | Move from straight-line depreciation to a depreciation method that brings more deductions forward (such as double-declining balance depreciation). | Incremental Improvement |
| Partial Expensing (percentage cap) | Allow some percentage (say, 50 percent) of the investment to be deducted immediately and spread the remainder out over 27.5 years. | Incremental Improvement |
| Partial Expensing (per-unit cap) | Allow expensing for up to a certain amount per unit, require remaining cost per unit to be depreciated over 27.5 years. | Incremental Improvement |
Notes: We have previously estimated the tax penalty associated with depreciation for residential structures at roughly 11 percent of costs, making a 10 percent ITC close to parity. *Transferability carries some transaction costs.

Source: Tax Foundation.
Some of these options could be deployed together, such as expensing with a per-unit cap and transferability.

Sen. Lisa Blunt Rochester (D-DE) recently released the Rental Housing Investment Act, which would allow expensing up to $150,000 per unit for all new rental units, with higher deductions available for projects that meet certain affordability requirements.

Rochester’s bill is notable as it focuses specifically on residential, but the idea of improving the tax treatment of residential structures is not new. Sen. Ted Cruz (R-TX) and Rep. Glenn Grothman (R-WI) introduced the CREATE JOBS Act in 2025, which included neutral cost recovery for both residential and nonresidential structures alike. Rep. Kevin Hern (R-OK) and former Sen. Mike Braun (R-IN) introduced the Renewing Investment in American Workers and Supply Chains Act in 2024, which proposed reducing the asset lives of residential and nonresidential structures to 20 years and introducing neutral cost recovery. And going all the way back to 2016, the House GOP tax reform framework included expensing for all capital investment, including residential structures.

Some form of improved cost recovery for structures—whether full expensing, expensing with a per-unit cap, neutral cost recovery, or simply shortening the asset life of residential structures—is one of the most powerful pro-housing supply options available to federal policymakers.

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About the Author

Expert

Alex Muresianu

Senior Policy Analyst Alex Muresianu is a Senior Policy Analyst at the Tax Foundation, focused on federal tax policy. Previously working on the federal team as an intern in the summer of 2018 and as a research assistant in summer 2020. He attended Tufts University, graduating with a degree in economics and minors in finance and political science.