Question

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.

Answer 1

Steve has the higher before-tax gain, but because Stephanie's interest is taxed less heavily than Steve's capital gains, she ends up with the higher after-tax real gain after accounting for inflation.

Step-by-step explanation:

The problem posed in the question pertains to comparing the before-tax real gain and after-tax real gain of two individuals, Steve and Stephanie, taking into account capital gains tax, income tax, and an inflation rate of 2%.

First, let's calculate the before-tax real gain for both individuals:
Steve bought land for $30,000 and sold it for $32,000 which is a nominal gain of $2,000. Due to 2% inflation, his real gain is slightly lower.
Stephanie earns a 6% interest on $30,000 which is $1,800; again, adjusted for 2% inflation, her real gain will be a bit reduced.

Now, after-tax real gain calculations:
Steve's $2,000 gain is halved to $1,000 after a 50% capital gains tax. Stephanie's interest of $1,800 is reduced by her 35% tax rate, resulting in $1,170. After adjusting for 2% inflation, she still has a higher after-tax real gain compared to Steve.