The United States is short millions of homes, and housing is the largest expense for most households. A tax policy known as “accelerated depreciation,” last applied to housing in the 1980s, could increase supply by lowering the tax cost of building.

Depreciation schedules, which determine how much and when to deduct the cost of a business asset over time, affect investment decisions across the economy, including in housing. Federal tax policy currently requires investors in rental multifamily housing development to recover their construction costs over 27.5 years.

But what if investors in multifamily housing could deduct all or a larger share of their costs in the first few years? Our research shows that allowing such “full or partial expensing” for multifamily housing investment would reduce the cost of investment, expand the set of viable projects, and increase housing supply—at a lower cost per unit than many direct subsidy programs. 

We estimate that the cost of capital would fall enough to make more projects viable, generating between 700,000 and 1,060,000 additional rental units over ten years. Full expensing would cost roughly $210 billion in federal revenue over that same period. The revenue cost is largely due to deductions taken sooner rather than over decades, and includes the costs and effects of an optional refundable credit that would expand access. 

Accelerated depreciation makes more new housing investments profitable

Developers decide to invest when their expected returns exceed a project’s “hurdle rate,” or the minimum return required to break even. Faster cost recovery increases the present value of deductions and lowers the effective tax rate on new investment. That lowers the hurdle rate, expanding the range of potential projects and improving early-year cash flow.

In the 1980s, it helped spark a construction boom and aggressive tax sheltering

The Tax Reform Act of 1981 shortened the depreciation period for rental housing from 32 years to 15 years and accelerated cost recovery in the early years of a project. Real estate construction boomed: from 1984 to 1986, multifamily construction exceeded 650,000 units annually—levels not reached since.

With front-loaded depreciation and fully deductible interest, highly leveraged projects often generated large early paper losses that investors could use to offset wages and other income. In response, the Tax Reform Act of 1986 lengthened depreciation to 27.5 years and introduced passive loss rules to curb these strategies. 

Construction declined significantly in the years following the reform; economist James Poterba suggested that the 1986 changes could raise long-run real rents by up to 15 percent by reducing incentives to invest in rental housing.

Accelerated depreciation would work differently now 

The early 1980s were marked by high nominal interest rates, and the tax code then featured high marginal tax rates, fully deductible interest, and few limits on the use of losses. Together, these factors made it easier to structure investments to produce deductible losses and reduce taxable income. Today’s environment is different:

• Marginal tax rates and interest rates are lower. In 1982, the top individual and corporate rates were 50 percent and 46 percent, respectively, compared with 37 percent and 21 percent today. Most real estate pass-through businesses also now benefit from an additional 20 percent deduction. When marginal rates are high, deductions are more valuable, increasing the incentive to generate early losses. Nominal interest rates were also much higher in the early 1980s—often above 10 percent—making it especially attractive to take deductions sooner.
• New rules change the investment equation. The Tax Reform Act of 1986 introduced passive loss rules that limited the ability of investors to use real estate losses to offset non-passive income. The 2017 Tax Cuts and Jobs Act imposed new limits on interest deductions. While some real estate businesses may elect out of those limits, doing so requires using a slower depreciation schedule, reducing the scope for highly leveraged tax sheltering.
• Housing demand is far higher than its supply. Unlike the 1980s, today’s problem is not overbuilding but chronic undersupply. Accelerated depreciation would operate in a market where additional supply is broadly needed. In other words, the real risk today is underbuilding, not overbuilding. 

Accelerated depreciation today would mean more rental units at a reasonable cost

As noted above, we estimate that expensing multifamily housing investment alongside an alternative optional 10 percent credit capped at $15,000 per unit would cost roughly $210 billion over 10 years in federal revenue.  Congress could reduce the fiscal cost with a per-unit cap on the amount eligible for expensing. Such a cap would also concentrate the subsidy on lower-cost projects. 

And, because expensing primarily benefits developers with sufficient taxable income, pairing it with a refundable or transferable credit would substantially broaden access, including for nonprofit and income-constrained developers. 

For example, allowing expensing up to $150,000 per unit alongside the credit would produce 600,000 to 900,000 units at a 10-year cost of about $150 billion.

Federal tax reform alone cannot solve the housing shortage: State and local land-use (zoning) restrictions remain the largest constraint on supply. But lowering the tax cost of building would complement zoning reform. 

The two together would increase housing production more than either policy alone.