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

See all articles by Joseph Gyourko

Joseph Gyourko

University of Pennsylvania - Real Estate Department; National Bureau of Economic Research (NBER)

Todd M. Sinai

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Date Written: October 15, 1998

Abstract

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

Gyourko, Joseph E. and Sinai, Todd M., The Asset Price Incidence of Capital Gains Taxes: Evidence from the Real Estate Industry and the Taxpayer Relief Act of 1997 (October 15, 1998). University of Pennsylvania, Wharton Real Estate Center Working Paper No. 311, Available at SSRN: https://ssrn.com/abstract=171726

Joseph E. Gyourko

University of Pennsylvania - Real Estate Department ( email )

Philadelphia, PA 19104-6330
United States
215-898-3003 (Phone)
215-573-2220 (Fax)

National Bureau of Economic Research (NBER)

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Todd M. Sinai (Contact Author)

University of Pennsylvania - The Wharton School ( email )

1465 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States
215-898-5390 (Phone)
215-573-2220 (Fax)

HOME PAGE: http://real.wharton.upenn.edu/~sinai

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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