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

Posted: 30 Jan 2008

See all articles by Milena Petrova

Milena Petrova

Syracuse University - Whitman School of Management; Bocconi University

David C. Ling

University of Florida - Warrington College of Business Administration

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

Suggested Citation

Petrova, Milena and Ling, David Curtis, Avoiding Taxes at Any Cost: The Economics of Tax-Deferred Real Estate Exchanges. Journal of Real Estate Finance and Economics, Vol. 36, No. 4, Available at SSRN: https://ssrn.com/abstract=1088759

Milena Petrova

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

David Curtis Ling (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-9307 (Phone)
352-392-0301 (Fax)

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