Question

Last year you bought a house for $200,000, and you sell the house this year for $230,000. Unfortunately, the government makes you pay taxes on your capital gains. Assume that the capital gains tax rate is 20%. Over the year, the CPI increased from 110 to 115.5.
1. What is your after-tax real return?.2 Suppose that the CPI increased from 110 to 121. What is your after-tax real return now?

Answer 1

Answer:

1. After-tax real return = $22,857.14

2. After-tax real return now = $21,818.18

Explanation:

To calculate these, we first claculate the following:

Capital gains = House selling price - House purchase price = $230,000 - $200,000 = $30,000

Capital gains tax = Capital gains * Capital gains tax rate = $30,000 * 20% = $6,000

Nominal after tax return = Capital gains - Capital gains tax = $30,000 - $6,000 = $24,000

Therefore, we have:

1. Over the year, the CPI increased from 110 to 115.5, what is your after-tax real return?

After-tax real return = Nominal after tax return / (New CPI / Old CPI) = $24,000 / (115.5 / 110) = $22,857.14

2 Suppose that the CPI increased from 110 to 121. What is your after-tax real return now?

After-tax real return now = Nominal after tax return / (New CPI / Old CPI) = $24,000 / (121 / 110) = $21,818.18