The Impact of Deferred Tax on the Purchase Prices in Czech Real Estate Transactions

The study examines the deferred tax in the valuation and acquisition of real estate companies, the behavior of the buyers and sellers in real estate transactions and the impact on the purchase price. We analyze the data from the Czech Republic commercial real estate market in the period of 2018-2019 where taxation provisions for Asset and Share Deal transactions induce a special type of a deferred tax - a latent capital gains tax (LCGT). Based on the data of 25 Share Deal real estate transactions we bring evidence that the LCGT was reflected in the purchase price by 0-50%, median value being 0%. We document that this market-imported percentage can be explained in two complementary ways. Firstly, using the capitalization approach, and secondly, using the behavioral approach by the bargaining power of the seller. Moreover, we show that the LCGT percentage reflected in the purchase price is dependent only on the discount rate and tax amortization period.