Tax Induced Divestment in the Residential Market - Insights from Investors and Non-investors

This study explores the effect of capital gains taxation on real estate transactions by comparing individual investors, that have greater timing ability and are more sophisticated, with owner-occupants. The study is based on a discontinuity in capital gains tax rates around the one-year holding period mark. The results document that investors that hold property for an investment purpose, relative to non-investors that are owner-occupants, exhibit a higher likelihood of selling immediately after the one-year holding period mark. Thus, frictions that inhibit optimal capitalization of tax rules differ based on investment and consumption objectives, i.e., for individual investors and non-investors. Additionally, the results depict the significance of sophistication and financial learning.