Sally buys a nice piece of property on Destin Beach for 1800

Sally buys a nice piece of property on Destin Beach for $1,800,000. She does not plan to build on the lot, but plans to hold it as an investment and sell it in 10 years. Since it is land, it is not depreciable. She wants a real rate of return of 10% after any taxes are paid. Assume inflation of 6%. If she will pay 15% tax on any capital gain, what must she sell the lot for in 10 years?

Solution

Real rate after taxes = 10%
required real rate before taxes = 10%/( 1- tax rate ) = 10%/0.85
(1 + Nominal rate) = ( 1+ real rate before taxes ) * ( 1+ inflation rate)
Nominal rate = ( 1+ real rate before tax ) * ( 1 + inflation rate ) -1 = ( 1+ 10%/0.85) ( 1+6%) -1 = 18.470588%
Amount to be sold after 10 years = 1,800,000 * ( 1 + 18.470588%)^10 = 9,803,427.77

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