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28 November, 00:51

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. Your after-tax real return is

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  1. 28 November, 02:01
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    Answer: 7%

    Explanation:

    A change in the CPI refers to a change in price levels for the period. A change from 110 to 115.5 means that inflation is 5.5%.

    You made a Capital Gain of;

    = 230,000 - 200,000

    = $30,000

    After tax Capital Gain = 30,000 * (1 - 20%)

    = $24,000

    After tax Nominal return is,

    = 24,000/200,000 * 100%

    = 12%

    Inflation is 5.5% meaning that your real after tax Capital gain is reduced by 5.5%.

    = 12% - 5.5%

    = 6.5%

    = 7% rounded off
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