Working Paper: NBER ID: w1267
Authors: Patric H. Hendershott; David C. Ling
Abstract: For well-diversified investors in depreciable real estate, the trading decision may be made with the sole objective of maximizing the property's depreciation tax shelter net of all capital gain taxes and transaction costs.This paper develops a dynamic programming model in which the optimal trading strategies and depreciation methods of all investors in a property are simultaneously determined. The effects of inflation, depreciation, recapture and choice of depreciation method are analyzed, and the costs of suboptimal trading are measured. The model is applied to both conventional residential and commercial income properties under post-ERTA tax rules. At single digitinflation rates, properties are traded multiple times, and the costs of suboptimal trading are significant.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trading decisions (G11) | depreciation tax shelter value (H25) |
| trading decisions (G11) | tax benefits (H20) |
| depreciation method (C51) | tax outcomes (H26) |
| inflation (E31) | trading activity (F19) |
| inflation (E31) | tax shelter value (H26) |
| trading decisions (G11) | optimal trading strategies (G13) |
| expected inflation rates (E31) | optimal trading strategies (G13) |