The Asset Price Incidence of Capital Gains Taxes: Evidence from the Real Estate Industry and the Taxpayer Relief Act of 1997
University of Pennsylvania, Wharton Real Estate Center Working Paper No. 311
Posted: 12 Aug 1999
Date Written: October 15, 1998
In this paper, we examine the asset price incidence of the capital gains tax cut in the Taxpayer Relief Act of 1997. By comparing two organizational structures in the real estate industry that differ only in how they should be affected by a change in capital gains tax rates, we isolate the effect of the tax cut from industry trends and firm-level fixed effects. Our estimates indicate that, in this industry, the benefit of a capital gains tax deferral when selling appreciated property accrued almost totally to the buyer of the asset, not the seller. Using share price data, we find that real estate firms that experienced a reduction in their tax subsidy in TRA97, called "UPREITs," had 8.6 percent less price appreciation in 1997 relative to 1996 than did the companies that had no tax change, known as "REITs." Firms that appeared most likely to be purchasers of property ? and which thus received the most benefit from the tax subsidy before it was cut ? endured the largest relative decline in share prices. We also find suggestive evidence that prices for new acquisitions rose for UPREITs relative to the REITs after TRA97. We conclude that up to 25 percent of UPREITs' share values is due to the remaining tax subsidy that they enjoy.
JEL Classification: H25, G38, G12
Suggested Citation: Suggested Citation