WASHINGTON — Amid an ongoing and deeply entrenched national housing affordability crisis, policymakers, economists, and urban planners increasingly converge on a singular diagnosis: America simply does not have enough homes. From the American Enterprise Institute (AEI) to the Center for American Progress (CAP), analysts across the political spectrum agree that millions of new housing units are urgently needed to restore historical vacancy rates, alleviate severe household overcrowding, and drive down runaway housing costs.
Yet, a major driver of this structural shortage is hiding in plain sight: the federal tax code. While the tax code heavily incentivizes homeownership, it paradoxically penalizes the creation of new rental housing. For decades, this bias has constrained the expansion of multifamily developments, leaving renters to compete for a stagnant supply of apartments.
Enter a bipartisan legislative push on Capitol Hill: the Rental Housing Investment Act (RHIA). Designed to overhaul how real estate developers recover construction costs, the proposal seeks to eliminate the tax code’s built-in penalty against rental housing. By allowing developers to immediately deduct capital investments rather than drawing them out over decades, proponents argue the legislation could fundamentally shift the economics of building new homes.
The Main Facts: The Depreciation Trap and the RHIA Solution
To understand why the American rental market is chronically undersupplied, economists point to the mechanics of cost recovery. Under current federal tax law, businesses that purchase machinery, tools, or industrial equipment can generally deduct the full cost immediately—a pro-growth policy that Congress recently made permanent.
However, a real estate developer who invests millions to construct a multi-family apartment building faces a vastly different reality. Instead of immediate expensing, the developer must spread their construction deductions out over a grueling 27.5-year straight-line depreciation schedule.
Because of inflation and the time value of money, this prolonged schedule drives the present value of those deductions down to roughly 50 cents on the dollar. Consequently, developers are effectively forced to pay taxes on business income that does not actually exist. This creates a severe tax penalty on multifamily residential projects. For countless developments, this tax burden pushes projected profit margins below viable thresholds; the projects never pencil out, the housing stock remains frozen, and society at large bears the cost.
What the Rental Housing Investment Act Proposes
Introduced in March by Senator Lisa Blunt Rochester (D-DE), with a companion bill introduced in the House in May, the Rental Housing Investment Act aims to rectify this disparity.
The legislation introduces a targeted form of full expensing for new rental housing structures containing two or more units. Under the RHIA framework:
- Standard New Construction: Developers of new rental housing would be permitted to immediately deduct up to $150,000 per unit, bypassing the 27.5-year depreciation mandate.
- Affordable Housing Projects: For developments meeting strict affordability criteria borrowed from the federal Low-Income Housing Tax Credit (LIHTC) program, the immediate deduction cap increases to $250,000 per unit.
- The "Original Use" Guardrail: To ensure the tax relief strictly encourages new development rather than rewarding existing real estate speculation, the bill restricts benefits to properties where the "original use commences with the taxpayer." Existing, previously owned buildings are entirely ineligible.
Proponents emphasize that this structure ensures nearly every dollar of forgone federal tax revenue directly stimulates new construction, rather than leaking into the trading of legacy housing stock.
Chronology: From Academic Warnings to Capitol Hill Legislation
The journey toward modern tax expensing for housing is the result of years of economic research intersecting with legislative strategy.
- Early 2020s: As the post-pandemic housing market sent rents soaring, think tanks including the Tax Foundation, AEI, and CAP published extensive literature identifying the 27.5-year depreciation schedule as a primary deterrent to institutional and independent multifamily investment.
- December 2025: Market data revealed that real estate investors poured roughly $166 billion into purchasing large, existing apartment properties—surpassing by 45 percent the $115 billion spent nationwide on building new multifamily housing. This stark imbalance underscored how the tax code favored trading old doors over building new ones.
- March 2026: Recognizing the widening affordability gap, Senator Lisa Blunt Rochester officially introduced the Rental Housing Investment Act in the Senate, establishing a targeted tax mechanism to drive down construction costs.
- May 2026: A bipartisan House companion bill was introduced, signaling broader legislative momentum and aligning cross-party interest in reforming capital cost recovery for residential real estate.
- Mid-2026: Economic modelers and policy analysts began releasing comparative studies evaluating how RHIA-style expensing compares to traditional, broad-based housing subsidies, demonstrating its superior targeting efficiency.
Supporting Data: Targeting New Construction vs. Subsidizing Legacy Stock
To evaluate the effectiveness of housing legislation, economists ask a simple question: Where do the tax dollars actually go?
Most popular federal housing proposals—such as first-time homebuyer tax credits, tax-preferred home purchase savings accounts, and broad rental assistance—function similarly to corporate tax rate cuts. They benefit both new and old housing alike, spreading financial relief across the entire existing inventory.
However, the existing housing market vastly dwarfs new construction. According to recent market data, existing home sales outnumber new home sales by roughly six to one. Consequently, broad homebuyer subsidies see about six out of every seven dollars bid directly on existing homes, bidding up prices rather than expanding physical capacity.
The Austin vs. San Diego Case Study
To illustrate how targeted expensing behaves differently from broad subsidies, analysts often compare two major metropolitan areas: Austin, Texas, and San Diego, California.
Both metros share remarkably similar structural baselines:
- Total Housing Stock: Austin boasts roughly 1.13 million homes, while San Diego has approximately 1.27 million.
- Annual Transactions: Both cities record roughly the same number of annual home sales (around 36,000 in Austin and 32,000 in San Diego).
Yet, their zoning environments and construction volumes are worlds apart. Thanks to more permissive zoning and pro-building policies, Austin permits roughly three times as much new multifamily housing as San Diego—averaging about 20,100 new units per year compared to San Diego’s 6,800.
| Metropolitan Area | Estimated Total Homes | Annual New Multifamily Units Permitted | Estimated Annual RHIA Tax Relief Benefit |
|---|---|---|---|
| Austin, TX | 1.13 Million | ~20,100 | ~$353 Million |
| San Diego, CA | 1.27 Million | ~6,800 | ~$120 Million |
Note: Calculations assume full take-up, binding $150,000-per-unit caps, a 26.6 percent average marginal tax rate, and no behavioral response.
Under a broad homebuyer subsidy program costing $10,000 per purchase, both cities would absorb roughly $300 to $400 million, regardless of whether they built new units. By contrast, under the RHIA framework, the Austin metro area would capture an estimated $353 million per year in tax relief, while San Diego would receive just $120 million. Building three times as much housing yields three times the tax relief, transparently rewarding cities that embrace growth and upzoning.
National Policy Impact: 1% vs. 93%
Expanding this logic nationwide reveals profound differences in policy efficiency:
- Policies Targeting Existing Homes (e.g., broad property tax relief or general rental assistance): Roughly 1 percent of forgone revenue reaches newly built homes, matching the single-year share of new construction relative to the total 147-million-unit housing stock.
- Policies Targeting Home Purchases (e.g., homebuyer credits): Roughly 15 percent reaches new homes, reflecting the 1-in-7 ratio of new sales to total sales.
- Expensing Without an Original Use Test: Roughly 50 percent reaches new construction, because investors routinely spend as much buying existing apartment complexes as developers spend building new ones. Removing the original use test would likely accelerate "churning"—where owners trade existing properties purely to accelerate tax deductions.
- The RHIA Proposal (With Original Use Test): Nearly every single dollar—an estimated at least 93 percent—directly incentivizes new construction. The tiny remaining fraction is absorbed by major teardown-and-rebuild projects (such as demolishing an old 10-unit structure to construct a denser 50-unit building).
Official Responses and Political Landscape
The introduction of the Rental Housing Investment Act has drawn cautious optimism from free-market economists, urbanists, and bipartisan lawmakers who view supply-side reform as the missing link in federal housing policy.
Proponents argue that while the federal government cannot directly force localities like San Diego to reform restrictive zoning codes or embrace upzoning, federal tax policy should at least stop actively penalizing the act of construction. By lowering the cost of capital for developers willing to build higher-density, multi-family housing, the legislation aligns federal fiscal incentives with local housing creation.
Critics and fiscal watchdogs, however, point to the initial scorekeeping challenges. On a conventional static scoring basis, implementing full expensing structures across the tax code carries significant nominal costs over a 10-year budget window. For instance, broad full expensing for all physical structures has been estimated to add over $500 billion to primary deficits conventionally.
However, tax economists emphasize that static scoring fundamentally misrepresents pro-growth investments. Because full expensing dramatically lowers the marginal tax burden on new capital investment, it generates substantial economic feedback. Dynamic scoring models consistently show that the massive surge in economic activity, job creation, and subsequent tax receipts generated by expensing policies can drastically offset—or even entirely reverse—initial conventional deficits.
Implications for the Future of American Real Estate
The debate over the Rental Housing Investment Act touches upon a core philosophical question in American economic policy: Should federal intervention reward existing asset holders, or should it prioritize the creation of brand-new productive capacity?
If passed, the RHIA would represent a watershed moment for American real estate development. By aligning the tax treatment of residential structures with that of industrial equipment and machinery, Washington would signal that building new shelter is as vital to the national economy as expanding manufacturing capacity.
Ultimately, tax reform alone cannot single-handedly solve the complex web of local zoning ordinances, environmental reviews, and labor shortages constraining American housing. But by removing the punitive 27.5-year depreciation anchor from new rental construction, the Rental Housing Investment Act offers a structurally sound, economically efficient tool to help close America’s multi-million-home deficit—ensuring that those who build the future of American housing are no longer penalized for doing so.
