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. © 2007 Springer Science+Business Media, LLC.
CITATION STYLE
Ling, D. C., & Petrova, M. (2008). Avoiding taxes at any cost: The economics of tax-deferred real estate exchanges. Journal of Real Estate Finance and Economics, 36(4), 367–404. https://doi.org/10.1007/s11146-007-9099-6
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