The scarcity of affordable housing has long been a problem of supply as much as policy and one Washington think tank believes it has found a financial fix hiding in the tax code. The Center for American Progress (CAP) says a tweak to how multifamily developers claim depreciation could unlock hundreds of thousands of new housing units over the next decade—while barely denting federal revenues.
The proposal hinges on the idea that money today is more powerful than money decades from now. Under current law, commercial real estate assets depreciate slowly—over 27.5 years for a residential structure such as an apartment building—forcing developers to wait years to recoup tax benefits that could otherwise be reinvested. CAP suggests replacing that long timeline with immediate expensing, effectively letting developers write off the cost of buildings right away and channel freed-up capital into new projects.
According to CAP's analysis, the change could generate between 706,000 and 1,062,000 new housing units over ten years. The total cost would run up to $206 billion, or about $20.6 billion annually, reducing federal tax revenues by just 0.4%—a modest tradeoff, the group argues, for a significant supply boost.
History supports their claim. The U.S. has revised its multifamily depreciation schedules before: the 1981 Economic Recovery Tax Act shortened it from 31 to 15 years, while the 1986 Tax Reform Act extended it back to 27.5 years. CAP noted that between 1983 and 1986, faster depreciation "was partly responsible for a large jump in multifamily construction." When the 1986 law reversed course, "homebuilding crashed," it wrote.
Studies cited by CAP show that accelerated depreciation not only lowers the cost of new investments but also increases cash flow—both of which are critical for attracting investors to an asset class often avoided because returns take too long to materialize. As more capital floods in, competition among investors could lower the cost of funds and further spur construction.
CAP modeled several versions of the policy, from partial to full expensing. One scenario featuring $150,000-per-unit expensing and a 10% refundable investment tax credit could yield between 598,000 and 898,000 additional units—about 755,000 on average—at a cost of $154 billion over a decade. However, the think tank noted that such per-unit caps would limit effectiveness in expensive markets like New York City, San Francisco, Los Angeles, Boston and Miami.
Whether through total expensing or a hybrid approach, CAP's analysis suggests that updating depreciation rules could do more than just change a line on a balance sheet—it could shift the trajectory of U.S. housing production itself.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.