Avoiding Taxes at Any Cost: The Economics of Tax-Deferred Real Estate Exchanges
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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.
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- Avoiding Taxes at Any Cost: The Economics of Tax-Deferred Real Estate Exchanges
The Journal of Real Estate Finance and Economics
Volume 36, Issue 4 , pp 367-404
- Cover Date
- Print ISSN
- Online ISSN
- Springer US
- Additional Links
- Commercial real estate
- Tax-deferred exchanges
- Transaction price
- Industry Sectors
- Author Affiliations
- 1. Department of Finance, Insurance and Real Estate, Warrington College of Business, University of Florida, Gainesville, FL, 32611, USA
- 2. Department of Finance, Whitman School of Management, Syracuse University, Syracuse, NY, 13244, USA