The Journal of Real Estate Finance and Economics

, Volume 36, Issue 4, pp 367-404

First online:

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

  • David C. LingAffiliated withDepartment of Finance, Insurance and Real Estate, Warrington College of Business, University of Florida Email author 
  • , Milena PetrovaAffiliated withDepartment of Finance, Whitman School of Management, Syracuse University

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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.


Commercial real estate Tax-deferred exchanges Transaction price