Question: A taxpayer can invest 10 000 in a taxable 10 year
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-year period. Which investment is preferable?
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