Avoiding Taxes at Any Cost: The Economics of Tax-Deferred Real Estate Exchanges

Article

DOI: 10.1007/s11146-007-9099-6

Cite this article as:
Ling, D.C. & Petrova, M. J Real Estate Finan Econ (2008) 36: 367. doi:10.1007/s11146-007-9099-6

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.

Keywords

Commercial real estate Tax-deferred exchanges Transaction price 

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Department of Finance, Insurance and Real Estate, Warrington College of BusinessUniversity of FloridaGainesvilleUSA
  2. 2.Department of Finance, Whitman School of ManagementSyracuse UniversitySyracuseUSA

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