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How Taxes and Required Returns Drove Commercial Real Estate Valuations over the Past Four Decades

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  • John V. Duca
  • Patric H. Hendershott
  • David C. Ling

Abstract

We document the evolution of U.S. tax law regarding commercial real estate (CRE) since 1975, noting changes in income and capital gains tax rates and tax depreciation methods. The most prominent changes were in the 1981 and 1986 Tax Acts, but numerous significant changes occurred in the last dozen years. We then compute both the present value of tax depreciation per dollar of acquisition price and an effective tax rate for CRE. We explain the quarterly variation in CRE capitalization rates using an error-correction framework and find that the long-run estimates are statistically significant in the way theory would suggest. Moreover, the required financial asset return and the tax depreciation variables temporally predict (“cause”) capitalization rates in the long run, but not vice versa.

Suggested Citation

  • John V. Duca & Patric H. Hendershott & David C. Ling, 2017. "How Taxes and Required Returns Drove Commercial Real Estate Valuations over the Past Four Decades," National Tax Journal, National Tax Association;National Tax Journal, vol. 70(3), pages 549-584, September.
    • Handle: RePEc:ntj:journl:v:70:y:2017:i:3:p:549-584
    DOI: 10.17310/ntj.2017.3.02
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    Cited by:

    1. Charles Ka Yui Leung & (single author only), 2021. "Handbook of Real Estate and Macroeconomics: An Introduction," ISER Discussion Paper 1137, Institute of Social and Economic Research, Osaka University.
    2. Carmichael, Benoît & Coën, Alain, 2018. "Real estate as a common risk factor in bank stock returns," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 118-130.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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