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

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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