Tax Induced Divestments

This paper presents evidence on differential tax related incentives for divestments in residential real estate markets. Assets that are held for at least a year are taxed at a lower capital gains tax rate. The paper exploits a discontinuity in capital gains tax rates around the one year holding period mark for residential property. First, the empirical results show that individual investors, relative to homeowners that hold property for consumption purposes, disproportionately time sales to avail such benefits. Secondly, experienced investors are more likely to capitalize on the discontinuous tax benefit. Lastly, the paper highlights a trade-off between timing sales and capitalizing on the differential saving between short and long term capital gains tax rates and depicts that returns are lower for divestments that occur immediately after the one year mark.