Question

Tax_Research_Problems_2_Instructions (1) (5) (1) - Saved to this PC Review View Help © Search = = 21 - = = Es Аавьсс Аавьсср Аавьс Аавьссс Аав Аавьсet Aa 1 Normal 1 No Spac... Heading 1 Heading 2 Title Subtitle Sub Paragraph Styles 3. A taxpayer can invest $10,000 in a taxable 10-year bond that yields an annual pre- tax return of 6 percent or buy land (a capital asset) for $10,000 that is expected to increase at an annual pre-tax rate of 4 percent. The taxpayer expects to hold the bond and the land for 10 years and expects to pay capital gains taxes of 20 percent when the land is sold. The taxpayer's marginal tax rate on ordinary income is expected to be 25 percent throughout the 10-vear period.

Answer 1

	Taxable Bond	Land
Pre tax investment	10000	10000
Pre tax return	600	400
Capital gains (20%)		80
Marginal tax rate (25%)	150
After tax Return	450	320
Annual return	4.50%	3.20%

The bonds investment is preferable since the return is higher.