Tax evasion in the real estate sector | VOX, CEPR Policy Portal

Tax evasion in the real estate sector | VOX, CEPR Policy Portal.

Tax evasion in the real estate sector: Using appraisals as a red flag

José García-Montalvo, Amedeo Piolatto, Josep Raya 19 April 2020

Tax evasion is a persisting problem across countries, with fraudulent behaviour especially common in the real estate sector. This column argues that tax authorities should use appraisals to identify potentially fraudulent real estate transactions. Transactions with an appraisal value that is low compared to the sales value are shown to have a higher likelihood of involving fraud. This is because low appraisals indicate an unconstrained buyer who, in contrast to a liquidity constrained buyer, is able to afford an (illegal) side payment to lower the sales value and thus the tax payment without resorting to a high mortgage.