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Trading and the Tax Shelter Value of Depreciable Real Estate

Listed author(s):
  • Patric H. Hendershott
  • David C. Ling

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1267.

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Date of creation: Jan 1984
Publication status: published as Hendershott, Patric H. and David C. Ling. "Trading and the Tax Shelter Value of Depreciable Real Estate." National Tax Journal, Vol. 37, No. 2, (June 1984), pp. 213-223.
Handle: RePEc:nbr:nberwo:1267
Note: PE
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  1. C. F. Sirmans, 1980. "Minimum Tax, Recapture and Choice of Depreciation Methods," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 8(3), pages 255-267.
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