Key to this legislation is the establishment of a new 20-year recovery period for both nonresidential real estate and residential rental properties. In simpler terms, this means that property owners will be able to write off their property investments over a 20-year span, thereby receiving tax deductions more quickly compared to the current longer periods. This is an amendment to Section 168(e)(3)(F) of the Internal Revenue Code. To further streamline economic benefits, the bill excludes these types of properties from bonus depreciation, which currently allows for an immediate, larger first-year deduction.
The central goal of this bill is to encourage investment in both commercial and residential rental markets by making the tax landscape more favorable. By shortening the depreciation period to 20 years, property owners can recover their investments faster, providing an incentive to build and renovate more properties—potentially increasing the supply of both commercial spaces and rental units.
To ensure that the financial benefit intended by this depreciation adjustment is fair and reflective of economic conditions, the bill introduces what’s called “Neutral Cost Recovery.” This system adjusts the depreciation deduction based on changes in the gross domestic product (GDP) deflator, effectively accounting for inflation. The metric of ‘gross domestic product deflator’ is a fancy term for measuring changes in prices for all goods and services produced in the economy, making sure the deductions properly reflect the value over time.
To break this down: the Neutral Cost Recovery Ratio is calculated by dividing the GDP deflator for the current period by the GDP deflator from when the property was first placed in service. It’s then adjusted slightly with a factor of 1.03 raised to the power corresponding to the number of full years the property has been in service. This complex formula ensures a fair, inflation-neutral depreciation method, designed to keep investment value steady over time, regardless of inflationary pressures.
Additionally, this adjustment will not alter the basis of the properties or impact their recapture under sections 1245 and 1250 of the tax code. What this means is the initial investment value remains constant for future tax events, avoiding potential complications when selling or further depreciating the property.
Hailed as a way to modernize and revitalize American commercial and residential infrastructure, this legislation seeks to provide a tax environment that promotes continuous investment and upgrades. The bill’s provisions could benefit a wide swath of demographic and industry groups—real estate developers, landlords, investors in commercial properties, and even tenants, who may see increased availability of rental units thanks to the enhanced incentives for landlords to build and maintain properties.
While the promise of accelerated depreciation could lead to a construction boom, potentially creating jobs and meeting the housing shortage, it could also present challenges. Quick turnarounds in large deductions could reduce government tax revenues in the short term, and some argue that without strict regulations, it could lead to uneven investment, with funds flowing only into high-return areas while neglecting underserved communities.
Funding for this initiative, as inferred from the bill, would naturally come from federal revenues, with the immediate loss offset potentially by long-term economic growth spurred by these investments.
Next, the bill will head to the Ways and Means Committee for scrutiny and discussion. Following committee considerations, if it manages to gather enough support, it will move to the House floor for debate and voting, eventually needing Senate approval and the President’s signature to become law.
It’s a significant puzzle piece in the broader economic and housing policy mosaic—seeking to catalyze growth in the property sector while striving to ensure the American workforce and supply chains remain robust and competitive. Whether it’s the springboard needed to kickstart much-needed infrastructure investments and meet growing rental demands, remains to be seen, but it undoubtedly sparks an engaging dialogue on enhancing America’s economic framework.
