Working Paper #311
The Asset Price Incidence of Capital Gains Taxes: Evidence from the Taxpayer Relief Act of 1997 and Publicly-Traded Real Estate Firms
Todd Sinai · Joseph Gyourko
Investing Real Estate Investment Trusts
• When an UPREIT purchases an appreciated property, the benefit of the property seller’s ability to defer capital gains taxation accrues almost totally to the UPREIT buyer, not the property seller.
• The Taxpayer Relief Act of 1997, which lowered the maximum capital gains rate, harmed UPREITs relative to non-UPREITs by reducing the tax subsidy from the ability to defer gains taxes by selling buildings to UPREITs.
• UPREIT firms had nearly 9 percentage points less share price appreciation in 1997 relative to 1996 than did non-UPREITs. The timing and magnitude matches the reduction in the UPREIT tax subsidy following TRA97.
• We estimate that as much as 25 percent of UPREIT share value relative to non-UPREITs is due to the remaining tax subsidy they enjoy. Stated differently, if the capital gains tax were eliminated, UPREIT values would decline 25 percent relative to non-UPREIT share prices.
• This does not mean that all non-UPREITs will experience a 25 percent increase in share price by adopting the UPREIT structure. The benefit appears to be highest only for those firms for which expected future property acquisitions constitute a larger proportion of their value.