Capital Gains Tax Avoidance in the Residential Market: Strategic Behavior in Price Reporting and Transactions

Property transactions in Turkey are subject to a transaction fee that is calculated based on transaction prices declared by sellers and buyers. Declared prices cannot be lower than property tax values which are far lower than the actual or observed market prices. Because declared prices are strategically reported at around tax values of the properties for cash purchases or at an adjusted price in accordance with the mortgage loan amount in the case of mortgaged sales, reliable transaction price data in the official records are not available. If a property is sold within five years after the purchase date and the price difference is higher than a certain exemption amount, remaining amount of capital gain is subject to capital gains tax. In this study, we explore the impact of capital gains tax on the re-selling behavior of property owners. We use a novel transaction level repeat sales dataset provided from the land registry agency. Our empirical analyses show that the number of transactions and declared purchase prices are significantly influenced by the capital gains tax threshold. We compare the transactions right before and after the 5-year-holding-period mark and find that transaction price changes between repeated sales are significantly lower in the pre-period than those in the post-mark. The results indicate that mortgage sales relative to cash sales are more likely to occur immediately after the five-year holding period threshold. This suggests that sellers are more confident in selling their properties without the concern of incurring a capital gains tax liability, likely due to the high loan amounts involved.