Optimal Holding Period of an Investment Property Under Different Systems of Income Taxation - An Individual Investor's Perspective

Abstract

Taxes, particularly income tax, may affect how long investors decide to hold on to an investment property. There exists a research gap regarding the implications of a distributed profit-based taxation system for the holding period of an investment asset. As a distributed profit-based taxation system allows investors to postpone income tax liability, it creates an advantage for investors operating under such a system compared to investors operating under other systems of income taxation. In this paper we model optimal holding periods under different systems of income taxation using a specific type of discounted cash flow model. We show that, theoretically, under the distributed profit taxation system, an optimal holding period for an investment property for an individual investor is the longest (ceteris paribus). This is in concordance with the circumstance that the after-tax value of the property for the investor is highest under the distributed profit taxation system. The results suggest that investment and property development projects under distributed profit taxation are not to be treated in the same way as projects under other tax systems with respect to time. Limitations of the study are related to the deterministic setting of the model as well as some restrictive assumptions.