1 Simple Tax Policy To Create Nearly 1 Million New Multifamily Homes

Housing costs are the largest expenditure category for American households. Experts believe the United States is short 2 million to 5 million homes, depending on the measure. This shortage is causing intense financial strain on households and limiting access to housing where people want to live, work, and raise families. In addition to pushing states and localities to lift regulatory barriers to new housing, Congress could enact a simple tax policy change that would spur the construction of rental housing, reducing rents and improving affordability across the housing market. Specifically, new Center for American Progress analysis finds that moving to immediate tax expensing of new multifamily rental housing could induce the creation of 706,000 to 1,062,000 new homes over the next decade at a cost of up to $206 billion, and some suggested modifications could more efficiently target the policy and lower its cost.

In general, when a business buys assets with a long life—such as equipment, furniture, vehicles, or buildings—federal tax law requires it to deduct the costs of those assets from its taxable income over time. This process of gradual depreciation differs from the immediate deductions available for payroll costs or the costs of a merchant’s goods sold. Unlike payroll or goods sold, capital assets such as buildings generate benefits over many years, so the tax code generally requires businesses to deduct the cost of those assets over time. However, if businesses were instead allowed to recover the full cost of depreciable property upon purchase, a policy known as “expensing,” they would realize substantial tax savings because of the time value of money. Under current law, investment in residential rental structures such as apartment buildings is depreciated evenly over 27.5 years. Figure 1 shows the depreciation timeline for a hypothetical apartment worth $250,000, along with several more generous modifications to this depreciation schedule.

The United States has previously experimented with changing the rules around multifamily rental housing depreciation. The Economic Recovery Tax Act of 1981 cut the depreciation schedule for rental housing from 31 years to 15 years. This was mostly reversed by the 1986 Tax Reform Act, which implemented the current 27.5-year depreciation schedule, among other changes. Multifamily housing construction greatly expanded over the 1983–1986 period (see Figure 2), and studies have credited the changes to depreciation schedules as greatly contributing to this boom. In particular, multifamily housing construction rose from 447,000 in 1981 to average more than 630,000 multifamily homes per year from 1984 to 1986, a 41 percent increase. The United States has not matched this level of building in any single year since 1986. One study found that the 1986 tax changes reduced the share of new building that is multifamily by 20 percentage points.

Beginning with the Job Creation and Worker Assistance Act of 2002, Congress introduced “bonus depreciation,” which allowed businesses to immediately deduct a fraction of the cost of their investments in equipment. Most recently, the One Big Beautiful Bill Act allowed investments in new “qualified production facilities”—principally, new manufacturing facilities—to qualify for 100 percent bonus depreciation, also known as full expensing. The act also made investment in capital equipment permanently eligible for full expensing. Research, such as a study by Eric Zwick and James Mahon (see also: Congressional Research Service compilation), finds that shortening depreciation schedules increases investment in equipment for two main reasons: It lowers the cost of new investments, and it increases cash flow, both of which help businesses that cannot borrow or otherwise access funds increase investment.

Similarly, speeding depreciation for multifamily housing would reduce businesses’ cost of capital, drawing in new investment to build new homes that are not profitable under the current tax regime. It would also increase cash flow, allowing developers and investors to recoup and reinvest their earnings faster into new buildings.

Speeding the depreciation of multifamily rental housing is a simple, direct, proven tool that federal policymakers can use to solve a large portion of the housing supply shortage. This tool can be costly; policymakers should consider limiting depreciation to $150,000 in immediate expensing per new housing unit delivered, with an alternative 10 percent refundable credit per home—capped at $15,000—for developers who prefer to take that option. This could induce the creation of 755,000 new homes over 10 years, at a cost of $154 billion.

Over the past three years, the Census Bureau reported that the United States created an average of about 510,000 multifamily homes annually. Multifamily housing includes everything from duplexes to large apartment buildings. Per Census Bureau data, multifamily home construction is broadly distributed throughout the country. Hundreds of units are permitted per year in Wyoming and Alaska, and tens of thousands are permitted per year in North Carolina and Texas. Multifamily homes have made up just more than 30 percent of homes built since 2020, the rest being single-family homes.

The United States has been suffering through a period of low homebuilding. The country built more than 600 homes per 100,000 people per year from 1968 to 2007, but since 2007, it has averaged just about half that rate. Multifamily housing construction has been particularly negatively affected. (see Figure 2) Analysts have attributed the slowdown to various factors, including rising interest rates, changing financing conditions, greater regulatory barriers to building, and higher construction costs. Importantly, changes to tax policy can and should complement other reforms to ease housing construction costs.

In general, renters have lower incomes than homeowners, so expanding the supply of rental units is especially impactful for those of lower means. Per the 2022 Federal Reserve Survey of Consumer Finances, renter households had a median income of $42,160, versus $94,040 for homeowners. Building more housing supply, even luxury rental supply, has been shown to bring down rental cost increases across the board. This is because each new unit absorbs some overall housing demand, and when high-income units occupy higher-cost units, cheaper units are freed up for lower-income families, a process called “filtering.” This process is why American cities that expand the supply of new buildings see the largest rent declines in their older buildings.

In its simplest form, providing 100 percent expensing for all new multifamily rental developments could induce the creation of 706,000 to 1,062,000 new homes over the next decade at a cost of $206 billion, or $198,000 to $287,000 of tax dollars per new unit. It is important to note that only taxable investors with enough taxable income relative to the expensed investment can take full advantage of expensing. To stimulate construction from all builders, the authors model the policy as if expensing were allowed alongside the option of a 10 percent refundable tax credit (up to $15,000 per unit) for developers with low cash flow and a direct payment to nontaxable developers. The full expensing of building costs could reduce the cost of capital between 11 percent and 17 percent for taxable investors. (see Methodology section)

Importantly, expensing would apply to most or all costs associated with building except for the purchase of land. In areas where land is scarce and expensive, the costs associated with acquiring land make up a much larger share of the total costs (See Methodology appendix for more), and the impact of expensing on the costs of building is smaller.

How housing supply responds to changes in the cost of building also depends on what economists call the “elasticity of housing supply.” The authors apply data points from a study (Saiz, 2010) that quantifies housing elasticities for U.S. metropolitan areas. The study found that metro area supply elasticities were the result of:

• The amount of “developable land,” excluding natural boundaries such as lakes and mountains.
• Land use regulations, including restrictive zoning, floor-area ratio caps, and more.

Land-constrained, highly regulated metro areas, such as Boston or San Francisco, have small elasticities, below 1. This means if the cost of building decreases by 1 percent, and rents stay the same, the number of new units will increase by less than 1 percent. In many inland metro areas, such as Detroit and Denver, the elasticity is between 1 and 2, and it is higher in areas with much more land available and fewer regulatory barriers to building, such as Austin and Charlotte.

To estimate the potential impact of multifamily housing expensing across the country, the authors applied the nationwide distribution of new multifamily units in Census Bureau building permits data for 2021 to 2024 to project how enacting different versions of expensing for multifamily housing structures would result in varying amounts of units being created in different parts of the country.

Instead of providing blanket expensing for all new multifamily rental building, the authors’ preferred policy would be a set amount of expensing per housing unit constructed, paired with a refundable credit for entities that cannot monetize immediate depreciation. An expensing cap per unit would encourage developers to control costs because only a limited amount of costs per unit would receive preferential tax treatment. A cap would also encourage developers to deliver more units at lower cost ranges, rather than fewer units targeted at the high-end market. Developers could do this by making smaller units, trimming amenities, or using other cost-saving measures.

Limiting expensing to $150,000 per unit, with a 10 percent refundable investment tax credit option capped at $15,000 (both adjusted yearly for inflation), would result in 598,000 units to 898,000 units being built, with a central estimate of 755,000 units built for $154 billion in total costs over a decade. The projected geographic spread of units is summarized in Figure 3.

As shown in Figure 3, the model projects that the proposal will induce the creation of thousands of new homes in most states. Metro areas in the South—and to a lesser extent, some Western ones—would see a large increase in new units, with metro Dallas, Austin, Houston, Phoenix, and Charlotte each gaining nearly 20,000 units or more. In general, this reflects where most current multifamily building is occurring, and where homebuilding elasticities are currently highest. In fact, the model finds that 29 percent of new units induced by a $150,000 expensing policy would be built in Texas and North Carolina. To the extent that other states and communities loosen their land use policies, their housing supply elasticity would increase, and a larger proportion of new units would be built there instead.

Large expensive metro areas, such as New York City, San Francisco, Los Angeles, Boston, and Miami, loom large in the public imagination on multifamily housing issues. However, the authors find that because of these areas’ current low levels of building, they would make up only 15.8 percent of the cost of full expensing with no cap and 13.5 percent of the cost under a $150,000 expensing cap. Both these proportions are approximately in line with these metro areas’ share of the national population (14.4 percent in 2024).

The $150,000-per-unit limit would have the effect of disproportionately limiting the spending and unit creation in very-high-cost areas. Under a $150,000 cap, about half of all building costs would go unexpensed in the first year in California and Massachusetts, while less than one-quarter of multifamily investment costs would be affected in Iowa and Louisiana. Nationwide, slightly more than one-third of building costs would go unexpensed under the $150,000 cap.

For instance, the model finds that 100 percent expensing would induce the creation of a roughly equal number of new units in Los Angeles County, California (6,500), and Hamilton County, Indiana (6,300), a rapidly growing county outside Indianapolis. However, about $4.7 billion would be spent overall in Los Angeles County, versus $780 million in Hamilton County. This is because of the overall higher cost of housing in Los Angeles. And because regulations so constrain the housing supply in Los Angeles, much more spending would go toward subsidizing housing that would have been built anyway, rather than toward new building. Introducing a $150,000 expensing cap would trim $1.7 billion in spending plus 2,200 units in Los Angeles County, and only $110 million in spending plus 350 units in Hamilton County.

A policy of expensing for multifamily housing can be customized and targeted in many different ways, whether to control costs, target specific areas of the country, or optimize the number of new units per tax dollar spent.

Figure 4 presents the model’s central estimate of the effects of various expensing and depreciation policies for multifamily homebuilding. The model’s specifications produce a range of outcomes, where the upper bound assumes housing supply quickly converges to the metro area elasticities reported in Saiz (2010), as builders and investors quickly adjust to the new policy and as governments at various levels aggressively liberalize regulatory constraints on homebuilding. The central estimate assumes a more gradual convergence toward these elasticities, consistent with moderate loosening of land use regulations. The lower-bound estimate assumes that persistent regulatory and financial barriers slow and constrain adjustment, keeping housing supply well below long-run elasticities. For 100 percent expensing, the number of homes created ranges from 1,062,000 to 706,000, with 892,000 new homes as the central estimate.

Providing a set dollar amount of instant depreciation per housing unit constructed is the policy that both delivers a large overall number of new units and does so at an efficient cost per unit. Simply accelerating depreciation timetables produces units efficiently but may not be up to the scale of what is needed to solve the housing shortage. Full expensing, or expensing as a percentage of costs, is less efficient per new unit created. A capped expensing structure would encourage developers to build more units and to limit the costs of their units because there would be no tax benefit for building more expensive units. Developers could do this by making smaller units, trimming amenities, or taking other cost saving measures. A cap of $150,000 in expensing per unit (annually adjusted for inflation) would cost $154 billion and induce a large amount of new units, 598,000 to 898,000, at a relatively low $174,000 to $254,000 in federal revenue expenditures per unit created.

If overall revenue cost is less important than creating the highest number of units, then a $250,000-per-unit expensing cap may be the best policy. This option would create 694,000 to 1,043,000 new units, essentially as many housing units as under 100 percent expensing but at $12 billion less in cost. This would result in an improved revenue cost per unit compared with full expensing.

Restricting expensing to just 50 percent of costs would decrease costs to $91 billion and result in 310,000 to 466,000 units over 10 years. Limiting expensing this way has historical precedent: When bonus depreciation for equipment was first enacted in 2002, it applied to only 20 percent of costs, though the percentage has fluctuated since. Moreover, many businesses do not have sufficient revenue to realize the full value of the tax deduction provided by 100 percent expensing in the first year. In the authors’ model, lowering the share to 50 percent increases uptake among recipients, as do all options short of full expensing. The less generous (“bite-sized”) and spread over time the depreciation policy is, the higher take-up will be. However, the 50 percent expensing option is the least efficient on a per-unit basis, especially because this option is modeled without the per-unit refundable credit option.

Another option is to roughly mimic the 1981 reforms with “accelerated depreciation” over 15 years—modeled after standard Modified Accelerated Cost Recovery System (MACRS) accelerated depreciation for other assets, which is slightly less generous than the 1980s policy, which included larger allowances at the beginning of the schedule. Accelerated depreciation would result in modest yearly tax benefits without overloading developers with deductions that exceed their ability to write them off. Relative to other approaches, this option is less effective at quickly scaling up housing production, producing only 297,000 to 446,000 units, but at a comparatively efficient cost of only $63 billion.

Overall, the policies modeled have rules around depreciation recapture that are broadly taxpayer-friendly. This analysis also assumes the corporate alternative minimum tax would either not apply to this incentive or not significantly affect take-up. It also does not assume any restrictions on deduction or credit take-up because of the use of other tax instruments or write-offs. However, policymakers may wish to consider the policies’ interactions with other sections of the tax code.

The 1980s experiment with accelerated depreciation existed in a context where investors and developers could also fully deduct their interest costs, use passive losses to offset all other losses, and the reforms applied broadly to commercial real estate, not just multifamily housing. Because of this, many have pointed to the 1981 depreciation changes as fueling “overbuilding,” which suppressed rent growth for years, but through which investors abused tax shelters and negative tax rates. Since then, the 1986 anti-abuse rules around passive losses have limited investors’ ability to engage in these schemes. Meanwhile, the 2017 Tax Cuts and Jobs Act also imposed new limits on deducting interest costs for C-corporations and many large pass-through businesses, though some real estate firms may elect to be exempted. Policymakers may wish to pair multifamily housing tax relief with additional rules limiting the deductibility of debt interest payments, perhaps by subjecting larger real estate pass-through businesses to the same deduction limitations C-corporations face under Section 163(j) of the Internal Revenue Code; currently, they may opt out. In this analysis, the authors assumed that businesses would finance 30 percent of new investment with debt and could deduct all those interest costs.

Currently, the largest federal tax subsidy for the construction of rental housing is the low-income housing tax credit (LIHTC), which awards federal tax credits (about $15 billion in 2026, per the Joint Committee on Taxation) for constructing units that are restricted to housing people who meet income guidelines. While housing for those of low means is socially valuable, one recent study (Soltas, 2024) finds that the LIHTC produces net new housing at a rate of about $1 million per new unit brought on the market. This is about five times the estimated cost per unit of these proposals to use expensing. (see Figure 4)

Further, LIHTC funds disperse very slowly. The Big Beautiful Bill (BBB) increased annual LIHTC credits for new construction by 12 percent, among other changes. But the Joint Committee on Taxation projects that in the third year of increased LIHTC awards, 2028, actual expenditures will only be about 3.7 percent ($579 million) higher than the previous baseline spending. This large gulf between the extra 12 percent authorization and the actual 3.7 percent take-up underscores how the LIHTC’s multiyear allocation process makes it ill-suited to quickly increase housing supply. Using the $1 million-per-net-unit number from Soltas (2024) implies that the BBB LIHTC boost will deliver only 579 new homes nationwide in 2028. Therefore, the LIHTC and multifamily tax expensing should be viewed as complements. Expensing can rapidly and cost-effectively deploy new units for all income levels, while the LIHTC can make some income-restricted units.

Importantly, not all business-side tax cuts are equally beneficial or appropriate for every task. When designing tax policy, it is important to ask what is being incentivized. For instance, open-ended cuts to corporate tax rates and pass-through business taxes are mostly ineffective and inefficient at creating new investment, as well as extremely regressive. That is because they are mostly designed to lower taxes on profits, not to incentivize new investment or jobs. However, delivering subsidies to homebuilders for investing in new multifamily housing units would reward investors and builders for increasing the housing supply. Research has shown firms’ investment decisions are responsive to changes in depreciation schedules. This tool can also target subsidies at the lowest end of the market, where new building may be most socially beneficial.

The central estimates produced in this analysis are reasonable but subject to substantial uncertainty for two main reasons. First, as stated, the elasticity of housing is heavily determined by individual states’ and localities’ choices about relaxing or tightening their land use regimes and regulatory processes. Significant progress has been made in individual states over the past few years, with signs of more to come. However, the path of future policy change is unknowable, and to the extent that land use rules stagnate or even tighten over the coming years, housing produced will be closer to the lower-bound estimates. To the extent that nationwide reform efforts, sometimes called “upzoning,” gain speed and intensity, homes created would tend toward the upper-bound estimate. Other policy changes that affect tariff levels and financing costs would also push the homes created toward the lower or upper bounds of the estimates.

Finally, the estimates of the units created by this tool likely err toward the high end because the analysis does not model how increasing housing supply would change rents. A large increase in housing supply would likely cause rents to fall or grow more slowly than general inflation, and indeed, this is one of the primary goals of enacting this tool. Falling rents would mean the incidence of this proposal will be more fully shared both by developers and investors (who enjoy higher after-tax profits) and by renters (who enjoy lower rents and newer places to live). One study (Poterba, 1992) estimated that the 1986 reforms contributed to lower multifamily housing construction, leading to 10 percent to 15 percent higher rents in the long run. If this proposal has a similar effect, median rents would be lower by $175 per month or $2,100 yearly, in current dollars. (Most expensing proposals are estimated to lower the user cost of capital by even more than Poterba estimates the 1986 reforms raised it.) Lower-than-expected rents mean developer and investor profits would rise by less than predicted, consumers would experience a greater budget dividend, and fewer units would be created than projected. However, because of the uncertainty, price effects were not incorporated into the model.

Cost of living, and housing costs in particular, are what the American public has identified as one of its top priorities. Federal policymakers who want to address the housing crisis face a difficult set of choices about how to use the policy levers at their disposal. On the one hand, it is clear that additional housing supply is required to bring down housing costs and prices. On the other hand, the main barrier to new supply is broadly agreed to be local zoning and land use regulations. Responsibility for these laws is generally dispersed at the state and local levels.

At the federal level, a simple tax policy change or set of changes could quickly and efficiently lead to the construction of up to 1 million new multifamily rental homes. Per tax dollar spent, this tool would create five new homes for each new home created by the LIHTC. While backers of business tax cuts frequently make promises that are not backed up by evidence, this proposal is based on a policy mechanism that has a proven track record and is surgically targeted at solving the housing crisis for the Americans most in need of relief.

A housing tax expensing incentive would work best when paired with reforms to land use and zoning rules that allow for more supply to be built where it is most valuable. It would also pair well with measures to reduce the burden that tariffs are placing on homebuilding. As the cost of living and affordability continues to weigh on Americans, it is worth asking what kinds of policies can actually deliver new housing and subsequent price relief at the scale and speed that addresses the public’s concerns.

The authors would like to thank Michael Negron, Natalie Baker, Chad Maisel, Jared Bernstein, Joe Rosenberg, Greg Leiserson, Matthew Berger, Yonah Freemark, Kennedy O’Dell, Andrew Lautz, David Cocagne, Sarah Wick, Michael Kaplan, David Garcia, JJ Smith, and Struan Robinson for their helpful comments and feedback on various versions of this report. We would also like to thank Mimla Wardak for her research assistance and fact-checking help and Jazmine Amoako for her fact-checking help. However, all responsibility for the content of the piece, including any errors or omissions, is the responsibility of the authors alone.