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Optimal Holding Period of an Investment Property Under Different Systems of Income Taxation – An Individual Investor’s Perspective

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  • Kantšukov Mark

    (School of Economics and Business Administration, University of Tartu, Estonia)

  • Sander Priit

    (School of Economics and Business Administration, University of Tartu, Estonia)

Abstract

Taxes, particularly income tax, may affect how long investors decide to hold on to an investment property. There exists a research gap regarding the implications of a distributed profit-based taxation system for the holding period of an investment asset. As a distributed profit-based taxation system allows investors to postpone income tax liability, it creates an advantage for investors operating under such a system compared to investors operating under other systems of income taxation. In this paper we model optimal holding periods under different systems of income taxation using a specific type of discounted cash flow model. We show that, theoretically, under the distributed profit taxation system, an optimal holding period for an investment property for an individual investor is the longest (ceteris paribus). This is in concordance with the circumstance that the after-tax value of the property for the investor is highest under the distributed profit taxation system. The results suggest that investment and property development projects under distributed profit taxation are not to be treated in the same way as projects under other tax systems with respect to time. Limitations of the study are related to the deterministic setting of the model as well as some restrictive assumptions.

Suggested Citation

  • Kantšukov Mark & Sander Priit, 2022. "Optimal Holding Period of an Investment Property Under Different Systems of Income Taxation – An Individual Investor’s Perspective," Real Estate Management and Valuation, Sciendo, vol. 30(3), pages 12-29, September.
    • Handle: RePEc:vrs:remava:v:30:y:2022:i:3:p:12-29:n:7
    DOI: 10.2478/remav-2022-0018
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    References listed on IDEAS

    as
    1. Aaro Hazak, 2008. "Profit vs. distributed profit based taxation and companies' capital structure," International Journal of Entrepreneurship and Innovation Management, Inderscience Enterprises Ltd, vol. 8(5), pages 524-541.
    2. Aaro Hazak, 2009. "Companies' Financial Decisions Under the Distributed Profit Taxation Regime of Estonia," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 45(4), pages 4-12, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    optimal holding period; distributed profit taxation; real estate investing; value maximization;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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