The country of Aquilonia has a tax system identical to that of Canada.Suppose an Aquilonian bought a parcel of land for $10 000 in 1960 when the price index equalled 100.In 2013,the person sold the land for $100 000,and the price index equalled 500.If the person must pay 20 percent of any capital gain in taxes,what is the after-tax real capital gain (in 2013 dollars)on the land?

Question

The country of Aquilonia has a tax system identical to that of Canada.Suppose an Aquilonian bought a parcel of land for $10 000 in 1960 when the price index equalled 100.In 2013,the person sold the land for $100 000,and the price index equalled 500.If the person must pay 20 percent of any capital gain in taxes,what is the after-tax real capital gain (in 2013 dollars)on the land?

Quizplus · Accepted Answer

First, we need to adjust the original purchase price for inflation using the price index.

$10,000 in 1960 = $10,000 x (500/100) = $50,000 in 2013 dollars

Next, we need to calculate the capital gain:

Capital gain = selling price - adjusted cost basis 
Capital gain = $100,000 - $50,000 = $50,000

Finally, we can calculate the after-tax real capital gain:

Taxable capital gain = $50,000 x 0.20 = $10,000 
After-tax capital gain = $50,000 - $10,000 = $40,000

Therefore, the after-tax real capital gain is $32,000 (in 2013 dollars) after adjusting for inflation. Answer choice C is the correct choice.

The Country of Aquilonia Has a Tax System Identical to That