AN EMPIRICAL ANALYSIS OF FEDERAL INCOME TAX CAPITALIZATION IN THE PRICING OF INCOME PRODUCING REAL PROPERTY (TAX CAPITALIZATION).

摘要

The basic premise is that the federal income tax treatment of an income producing asset will determine the price at which the asset is traded in a market. Changes in federal income tax law that affect the amount or timing of cash flows produced by an asset can cause the asset's market price to change. The Tax Reform Act of 1986 (TRA 86) includes provisions that lowered marginal tax rates, extended the depreciable life of real property, eliminated accelerated depreciation of real property and imposed strict limitations on the current deductability of net losses produced by real property rental activities. Each of these provisions potentially affects the amount or timing of after-tax cash flows produced by investments in income producing real property.; Property prices in the Houston area apartment market adjusted in a rapid and efficient manner to the changes in expected future after-tax cash flows that were caused by the Tax Reform Act of 1986. Lower post-TRA 86 marginal tax rates caused the tax shelter value of depreciation deductions to decrease and the after tax value of expected future net operating income to increase. Tax rate estimates of both pre and post-TRA 86 marginal investors in Houston area apartment properties indicate that the marginal investor is a high marginal tax rate individual taxpayer. When expected future net operating incomes are discounted at a risk premium of nine percentage points above 30 year U.S. Treasury bonds results indicate full capitalization of federal income taxes into property values and rents in accordance with maximum statutory tax rates that apply to individual taxpayers.; A real estate market capitalizes the effects of expected future tax rates and rules into current prices of income producing real property. This suggests that changes in tax policy with respect to income producing real property should be carefully considered. If the expected effects of a change in tax law on after-tax cash flows are immediately capitalized into property prices then changes in tax law can create substantial and immediate transfers of wealth between the government, property owners and tenants. Taxes are capitalized into property values in accordance with the maximum statutory tax rate of individual taxpayers both before and after TRA 86. (Abstract shortened with permission of author.).