Even when held in taxable accounts, as long as the inflation rate is confined to the long-term historical average of 2.5%-3% per year, the retiree should be able to earn a positive after-tax real rate of return
. To mitigate the impact of federal income taxes when TIPS are held in taxable accounts, a retiree should consider such strategies as purchasing TIPS in the secondary market at a discount in order to defer reporting the market discount, recognizing capital losses if the price of the bond falls below its adjusted principal, and recognizing long-term capital gain to offset subsequent interest income.
In our model, by contrast, an increase in the inflation rate causes a decrease in both the after-tax real rate of return
to capital and the before-tax real rate of return to capital, and it also widens the spread between these two rates.
As the rate of inflation increases, the after-tax real rate of return
decreases, even though the nominal rate of return increases in exact proportion to the inflation rate.
Results show that under certain plausible conditions, the mid-rotation asking price for forested properties can be from 30 to over 40 percent above the highest bid when ask and bid are computed to guarantee buyer and seller the same after-tax real rate of return
. While these findings are based on restrictive assumptions, the general importance for market decisions is discussed.