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Financial Leverage, Taxation, and the Maximization of Investment Value

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  • John McDonald

Abstract

This paper uses a model of value maximization to derive a condition for the optimal amount of financial leverage to maximize the value of equity for a real estate investment entity. Both untaxed entities and taxed entities have a strong incentive to use financial leverage. If investment returns are taxed at a rate that is lower than the rate at which interest payments can be deducted, the value-maximizing scale of investment is larger than in the absence of taxation. The example of a mezzanine loan added to a base loan is included.

Suggested Citation

  • John McDonald, 2020. "Financial Leverage, Taxation, and the Maximization of Investment Value," Journal of Real Estate Portfolio Management, Taylor & Francis Journals, vol. 26(2), pages 161-169, December.
    • Handle: RePEc:taf:repmxx:v:26:y:2020:i:2:p:161-169
    DOI: 10.1080/10835547.2020.1858006
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