A federal tax code change could subsidize more residential development — helping address a nationwide housing shortage.
That's according to Richard Green, a University of Southern California professor and director and chair of USC's Lusk Center for Real Estate.
Accelerated depreciation "could be a very cheap way of increasing the housing supply," Green said Thursday at the IREM Real Estate Forecast Breakfast.
Green, who taught real estate finance and economics courses for 12 years at University of Wisconsin-Madison, was the keynote speaker at the event, held at Milwaukee's Wisconsin Club.
His presentation touched on policy changes under President Donald Trump's second term. That includes Trump's desire to extend tax cuts enacted during his first term, and which generally expire on Jan. 1, 2026.
Tax code changes approved by the Republican-led Congress during Trump's first term included a revised depreciation formula.
Depreciation allows an investor to deduct a portion of an asset’s cost over its useful life, reducing the investor's taxable income.
The 2017 tax code changes allowed investors to accelerate depreciation within the first year.
"This provision dramatically shifted the math for real estate investors, making it possible to offset other active income with large, upfront deductions," according to a blog post by Baltimore-based Dominion Financial Services.
"The result? Real estate investment became a highly efficient tax shelter for those with substantial active income," it said.
That accelerated depreciation is being gradually phased out, "decreasing by 20% each year from 100% in 2022 until it reaches 0% by 2027," the post said.
Green said an earlier use of accelerated depreciation in the 1980s during President Ronald Reagan's administration helped boost the housing supply. He was opposed to that policy then, but said it worked.
"I was wrong," he said.
Another speaker, New Land Enterprises Chief Financial Officer Sheldon Oppermann, said accelerated depreciation could help promote more housing. Milwaukee-based New Land is a large apartment developer.
Milwaukee has a surplus of higher-end apartments, those that rent for $2.50 per square foot and higher, Oppermann told the group.
The city needs more apartments at monthly rents below that mark, he said.
But it's difficult to finance such units given construction costs that are much higher compared to pre-pandemic times, as well as higher interest rates used by the Federal Reserve to combat inflation, Oppermann said.
"We believe the city will act" to help finance such workforce housing developments, Oppermann said.
Mayor Cavalier Johnson, Common Council President Jose Perez and other city officials have been working on that issue, the Journal Sentinel has reported.
Meanwhile, both Oppermann and Green cautioned against Trump's plans to enact tariffs — which could drive up the cost of lumber imported from Canada.
Green also said mass deportations of undocumented people could have a big impact on the construction trades.
"This is a pool of labor we're relying on," he said.