Overall, the maximum effect a Section 1031 exchange is likely to have on

observed transaction prices in a competitive residential market (when the marginal buyer

and seller are not exchange motivated) is estimated to range from about 1 percent to

approximately 11.5 percent.

 In Table 2 I repeat the simulation analysis for non-residential real estate. The only

difference in this case is that non-residential real estate, such as office, industrial and

retail properties, has a 39 year cost recovery period (RECPER). All other assumptions in

the simulation analysis remain the same.

Table 2 reveals results similar to Table 1. All else equal, the value of tax deferral tends to

increase with its duration. Therefore, with the longer depreciation recovery period of 39

years, the maximum net benefit from using an exchange will also be higher. However,

with longer recovery period, benefits from depreciation each year are smaller compared

to if faster depreciation schedule is used. Hence, values in Table 2 will tend to be smaller

than the corresponding values in Table 1 for small appreciation rates. For appreciation

rate 7t1 = 10 percent and higher, the faster depreciation effect is offset by higher

appreciation and values in Table 2 become higher than the corresponding values in Table

1.

 I record a maximum benefit based on all simulations of 13.25 percent in Panel F for

HOLD' = 39, HOLD2 = 39 and 7c1 = 2 percent. There is a U-shaped relationship between

INCNPVt and HOLD2. At first INCNPVt increases with HOLD2, it peaks at year 25 for

Panels A though D and then it decreases at a slow rate. With Panels E and F, where the

tax rate on capital gain income is set to 20 percent there is a strictly positive relationship