Trading and the Tax Shelter Value of Depreciable Real Estate

28 Pages Posted: 5 Jul 2004 Last revised: 14 Oct 2008

See all articles by Patric H. Hendershott

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

David C. Ling

University of Florida - Warrington College of Business Administration

Date Written: 1984

Abstract

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.

Suggested Citation

Hendershott, Patric H. and Ling, David Curtis, Trading and the Tax Shelter Value of Depreciable Real Estate (1984). NBER Working Paper No. w1267, Available at SSRN: https://ssrn.com/abstract=321316

Patric H. Hendershott (Contact Author)

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Curtis Ling

University of Florida - Warrington College of Business Administration ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-9307 (Phone)
352-392-0301 (Fax)

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