Avoiding taxes at any cost: The economics of tax-deferred real estate exchanges

David C. Ling, Milena Petrova

Research output: Contribution to journalArticle

12 Scopus citations

Abstract

This study examines the role tax-deferred exchanges play in the determination of reservation and transaction prices in U.S. commercial real estate markets. Taxpayers face significant time constraints when seeking to complete a delayed tax-deferred exchange. In a perfectly competitive market, a weakened bargaining position would not affect the transaction price. However, in illiquid, highly segmented commercial real estate markets, the exchanger may be required to pay a premium for the acquired property relative to its fair market value. Using a unique and rich dataset of commercial property transactions, we find that tax-motivated exchange buyers pay significantly more, on average, than non-exchange investors for their apartment and office properties, all else equal. Moreover, these average price premiums generally exceed the tax deferral benefits investors obtain by the use of a tax-deferred exchange. This result is robust to a number of alternative specifications. Thus, for many investors the pursuit of tax avoidance comes at a steep price.

Original languageEnglish (US)
Pages (from-to)367-404
Number of pages38
JournalJournal of Real Estate Finance and Economics
Volume36
Issue number4
DOIs
StatePublished - May 1 2008

Keywords

  • Commercial real estate
  • Tax-deferred exchanges
  • Transaction price

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Urban Studies

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