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 language | English (US) |
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Pages (from-to) | 367-404 |
Number of pages | 38 |
Journal | Journal of Real Estate Finance and Economics |
Volume | 36 |
Issue number | 4 |
DOIs | |
State | Published - May 1 2008 |
Keywords
- Commercial real estate
- Tax-deferred exchanges
- Transaction price
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
- Urban Studies