Steve purchases some land for $30,000.He maintains it,but makes no improvements to it.One year later he sells it for $32,000.Stephanie puts $30,000 in a savings account that pays 6% interest.Steve has to pay the 50% capital gains tax,Stephanie is in the 35% tax bracket.The inflation rate was 2%.Who had the higher before-tax real gain and who had the higher after-tax real gain?
A)Steve had both the higher before-tax real gain and the higher after-tax real gain.
B)Steve had the higher before-tax real gain but Stephanie had the higher after-tax real gain.
C)Stephanie had the higher before-tax real gain but Steve had the higher after-tax real gain.
D)Stephanie had both the higher before-tax real gain and the higher after-tax real gain.

Question

Quizplus · Accepted Answer

Before-tax real gain is calculated as the difference between the selling price and the original price adjusted for inflation. For Steve, the before-tax real gain is:

$32,000 - $30,000*(1+0.02) = $32,000 - $30,600 = $1,400

For Stephanie, the before-tax real gain is:

$30,000*(1+0.06) - $30,000*(1+0.02) = $1,800

Therefore, Stephanie had the higher before-tax real gain.

After-tax real gain takes into account taxes paid on the gains. For Steve, the after-tax real gain is:

($32,000 - $30,000)*0.5*(1-0.5) - $1,400*(1-0.5) = $5,800

For Stephanie, the after-tax real gain is:

$1,800*(1-0.35) = $1,170

Therefore, even though Steve had the higher before-tax real gain, Stephanie had the higher after-tax real gain.

Steve Purchases Some Land for $30,000