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Do Tax‐Deferred Exchanges Impact Purchase Price? Evidence from the Phoenix Apartment Market
Author(s) -
Holmes Andrew,
Slade Barrett A.
Publication year - 2001
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1080-8620.00023
Subject(s) - economics , capitalization , apartment , hedonic index , phoenix , monetary economics , index (typography) , financial economics , finance , microeconomics , price index , philosophy , linguistics , civil engineering , world wide web , computer science , engineering , medicine , metropolitan area , pathology
Many authors have commented on the compliance risk associated with tax‐deferred exchanges. However, no published studies explicitly address whether the risks associated with the exchange process impact the price at which exchanged assets trade. Using a unique data set that documents transactions for nondirect exchanges, this study examines the price impact of tax‐deferred exchanges on apartment transactions in the Phoenix, Arizona, market. Consistent with the price pressure hypothesis originally developed by Scholes (1972) and Kraus and Stoll (1972) and the tax capitalization hypothesis proposed by Oates (1969), the data show that exchange participants pay an economically significant premium to acquire replacement assets. A conventional hedonic price index is generated to investigate the rational bounds of the exchange premium.