Rental Housing and the Economic Recovery Tax Act of 1981

Abstract

This article presents a study of the impact of ERTA on the market for rental housing. Major changes in capital recovery periods and in the methods of depreciation available to investors in rental housing have been brought about because of ERTA. The effects of these changes are modeled, and short-run changes in demand price and rents are simulated with a baseline case deemed typical of a rental housing development. Results indicate that depending on inflation, declines in rent-to-value ratios ranging from 20% to 33% and 24% to 48% for conventional and low-income housing, respectively, may be expected. This implies some substitution of low-income rental housing, for otherwise, identical housing may occur and, because of new capital recovery provisions, properties will be bought and sold more frequently than previously.

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