A bipartisan group of House Ways and Means Committee members is calling for a new immediate deduction for residential rental unit construction to increase the housing supply and improve affordability.
Representatives Linda Sánchez (D-CA), Claudia Tenney (R-NY), Jimmy Panetta (D-CA) and Darin LaHood (R-IL) introduced the Rental Housing Investment Act, H.R. 8996, on May 21.
Rental Housing Investment Act Would Allow Immediate Deduction
The bill would add § 168(o) to the Tax Code, to allow developers to claim a depreciation deduction in the year a residential rental property is placed in service. The deduction would only be allowed for new construction, the lawmakers explain in a press release, to ensure the tax benefit leads to increased housing supply.
The deduction would equal $150,000, multiplied by the total number of dwelling units. The bill also provides for an enhanced deduction of $250,000 per unit for certain projects that include income-restricted units.
Under the Modified Accelerated Cost Recovery System, or MACRS, depreciation for residential rental property is calculated using the straight-line method and a mid-month convention. Under IRC § 168(c), residential rental property has a recovery period of 27.5 years. Taxpayers may instead elect the Alternative Depreciation System under § 168(g)(2)(C), which carries a 30-year recovery period.
The lawmakers said in a press release that this long cost recovery period “mak[es] many otherwise viable projects financially difficult, especially in a high-interest-rate environment.”
The House measure follows introduction of a Senate companion bill earlier this year. Senator Lisa Blunt Rochester (D-DE) introduced S. 4080 in March, but that bill has yet to be taken up by the Senate Finance Committee.
Blunt Rochester said the Rental Housing Investment Act “lowers construction costs and helps get more shovels in the ground so we can expand the supply of rental housing, from townhomes to apartment complexes.”
Tenney described the measure as a “practical, market-driven approach” to reducing housing development costs and expanding supply.
How Rental Housing Expensing Could Work
Experts also say immediate expensing could help increase multifamily dwelling construction.
A recent analysis by the Center for American Progress, or CAP, found that allowing immediate expensing for new multifamily rental housing could result in as many as 706,000 to 1,062,000 new homes being constructed over the next 10 years. However, CAP said such a policy would cost about $206 billion.
Meanwhile, CAP estimates that limiting expensing to $150,000, with an alternate 10% refundable credit per home capped at $15,000, would cost $154 billion over a decade. The policy could still induce the construction of 598,000 to 898,000 new homes, the group says. However, it cautions that “the $150,000-per-unit limit would have the effect of disproportionately limiting the spending and unit creation in very-high-cost areas.”
CAP found that allowing immediate expensing, with or without a cap, would provide a greater return than the Low-Income Housing Tax Credit, or LIHTC, the largest current tax subsidy for rental housing. However, because the LIHTC is available for the construction of income-restricted units, CAP views the LIHTC and expensing as complements. “Expensing can rapidly and cost-effectively deploy new units for all income levels, while the LIHTC can make some income-restricted units,” it explains.
The Tax Foundation’s Alex Muresianu also sees residential expensing as a step in the right direction to boost supply. “Allowing immediate deductions for any form of capital investment, including in rental housing, eliminates a tax penalty,” Muresianu told Checkpoint.
In a recent post, Muresianu described “improved cost recovery for structures” as “one of the most powerful pro-housing supply options available to federal policymakers.” Among the options to achieve this are full and per-unit expensing, he explained.
“While the Rental Housing Investment Act does not go as far as making all residential rental housing investment immediately expensed, it is a substantial improvement to the tax treatment of rental housing investment,” said Muresianu.
For more on the current computation of MACRS depreciation for residential rental property, see Checkpoint’s Federal Tax Coordinator 2d ¶ L-9103.
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