To solve equation (16) numerically, the following base-case assumptions for the

parameter values are made:

* Price of relinquished and replacement property: Pt = Pt
* Cost recovery period (RECPER): 27.5 years for residential and 39 years for non-
 residential commercial properties
* Selling costs (SCI and SC,'): 3 percent of sale price
* Exchange costs (ECt): equal to SCI
* Ordinary income tax rate (r,): 35 percent
* Capital gain tax rate (cg): 15 percent
* Depreciation recapture tax rate (rd,): 25 percent
* After-tax discount rate (k): 8 percent
* Non-depreciable portion of original tax basis (L h_ and Lz ): 20 percent

 The price of the replacement property is assumed to be equal to the price of the

relinquished property to abstract for any effects unequal equity positions would have on

time t inflows and outflows as well as future depreciation deductions. Note that the

assumed magnitude of p1 = p2 does not affect the numerical simulation results because

INCNPVt is divided by the price of the replacement property to produce a percentage

price effect. Other key variables in the calculation of INCNPVt include the number of

years since acquisition of the relinquished property, HOLD1, the annualized rate of price

appreciation since acquisition of the relinquished property, 7r1, and the expected holding

period of the replacement property, HOLD2.1

 Table 1 represents the simulation results for residential commercial real estate. The

top panel in Table 1 contains the base case simulation results. One pattern is noteworthy:

the incremental value of an exchange is unambiguously positively related to HOLD1. For

example, assuming HOLD2 = 8, HOLD1 = 5, and 7nc = 6 percent, INCNPVt is equal to



1 It is straightforward to show that the value of INCNPV, from equation (16) is not affected by the rate at
which the replacement property is expected to appreciate in nominal value.