The Impact of Like-Kind Exchanges on Investment, Leverage, and Liquidity

David C. Ling and Milena Petrova

Journal of Real Estate Literature, 2020, vol. 28, issue 1, 30-49

Abstract: The empirical evidence on the effects of tax incentives on investment is mixed. Recent finance and accounting empirical studies have relied on cross-sectional studies using financial statement data; however, such research suffers from measurement issues (Hanlon & Heitzman, 2010). Using a unique transaction dataset, we examine the impact of tax deferral through like-kind exchanges on investment in the real estate market. Furthermore, we investigate the link between the deferral of capital gain taxation and the increase in the supply of assets available for acquisition due to reduced investment holding periods. Our empirical analyses demonstrate that like-kind exchanges are associated with increased investment and shorter holding periods. In addition, tax-deferral also results in reduced leverage, which represents an increased equity investment. Our results demonstrate the importance of tax-deferral through like-kind exchanges as a tool to promote investment activity, expand business, and improve liquidity. These results are especially relevant in the light of recent legislation that limits the use of like-kind exchanges to real assets.

Date: 2020
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DOI: 10.1080/09277544.2020.1790275

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