Private owners can gain by employing their resources in ways that are beneficial to others, and they bear the opportunity cost of ignoring the wishes of others. Realtors often advise home owners to use neutral colors for countertops and walls in their house because they will improve the resale value of the home. As a private owner you could install bright green fixtures and paint your walls deep purple, but you will bear the cost (in terms of a lower selling price) of ignoring the wishes of others who might want to buy your house later. On the other hand, by fixing up a house and doing things to it that others find beneficial, you can reap the benefit of a higher selling price. Similarly, you could spray paint orange designs all over the outside of your brand-new car. but private ownership gives you an incentive not to do so because the resale value of the car depends on the value that others place on it.
Consider a parcel of undeveloped privately owned land near a university. The private owner of the land can do many things with it. For example, she could leave it undeveloped. turn it into a metered parking lot, erect a restaurant, or build rental housing. Will the wishes and desires of the nearby students be reflected in her choice, even though they are not the owners of the property? Yes. Whichever use is more highly valued by potential customers will earn her the highest investment return. If housing is relatively hard to find but there are plenty of other restaurants, the profitability of using her land for housing will be higher than the profitability of using it for a restaurant. Private ownership gives her a strong incentive to use her property in a way that will also fulfill the wishes of others. If 5he decides to leave the property undeveloped instead of erecting housing that would benefit the students, she will bear the opportunity cost of forgone rental income from the property.
As a second example, consider the owner of an apartment complex near your campus. The owner may not care much for swimming pools, workout facilities, study desks, washers and dryers, or green areas. Nonetheless, private ownership provides the owner with a strong incentive to provide these items if students and other potential customers value them more than it costs to provide them. Why? Because tenants will be willing to pay higher rents to live in a complex with amenities that they value. The owners of rental property can profit by providing an additional amenity that tenants value as long as the tenants are willing to pay enough additional rent to cover the cost of providing it. Because renters differ in their preferences and willingness to pay for amenities, some will prefer to live in less expensive apartments with fewer amenities, while others will prefer to live in more expensive apartments with a greater range of amenities. By choosing among potential apartment complexes, renters are able to buy as few or as many of these amenities as they wish.

In many situations, the IRS does not allow reinvestment of funds generated by a project without an interim tax penalty. This can be important when you compare one long-term investment to multiple short-term investments that are otherwise identical. For example, consider a farmer in the 40% tax bracket who purchases grain that costs $300, and that triples its value every year.
• If the IRS considers this farm to be one long-term two-year project, the farmer can use the first harvest to reseed, so $300 seed turns into $900 in one year and then into a $2,700 harvest in two years. Uncle Sam considers the profit to be $2,400 and so collects taxes of $960. The farmer is left with post-tax profits of $1,440.
• If the IRS considers this production to be two consecutive one-year projects, then the farmer ends up with $900 at the end of the first year. Uncle Sam collects 40% ·$600 = $240, leaving the farmer with $660. Replanted, the $660 grows to $1,980, of which the IRS collects another 40% ·$1, 980 = $792. The farmer is left with post-tax profits of 60% ·$1, 980 = $1, 188.
The discrepancy between $1,440 and $1,188 is due to the fact that the long-term project can avoid the interim taxation. Similar issues arise whenever an expense can be reclassified from “reinvested profits” (taxed, if not with some credit at reinvestment time) into “necessary maintenance.”
Although you should always get taxes right—and really know the details of the tax situation that applies to you—be aware that you must particularly pay attention to getting taxes right if you are planning to undertake real estate transactions. These have special tax exemptions and tax depreciation writeoffs that are essential to getting the project valuation right.

It is important for you to understand the difference between before-tax expenses and after-tax expenses. Before-tax expenses reduce the income before taxable income is computed. After-tax expenses have no effect on tax computations. Everything else being equal, if the IRS allows you to designate a payment to be a before-tax expense, it is more favorable to you, because it reduces your tax burden. For example, if you earn $100,000 and there were only one 40% bracket, a $50,000 before-tax expense leaves you ($100, 000 − $50, 000) · (1 − 40%) = $30, 000 , Before-Tax Net Return · (1 − Tax Rate) = After-Tax Net Return while the same $50,000 expense if post-tax leaves you only with $100, 000 · (1 − 40%) − $50, 000 = $10, 000 .
We have already discussed the most important tax-shelter: both corporations and individuals can and often reduce their income tax by paying interest expenses, although individuals can do so only for mortgages.
However, even the interest tax deduction has an opportunity cost, the oversight of which is a common and costly mistake. Many home owners believe that the deductibility of mortgage interest means that they should keep a mortgage on the house under all circumstances. It is not rare to find a home owner with both a 6% per year mortgage and a savings account (or government bonds) paying 5% per year. Yes, the 6% mortgage payment is tax deductible, and effectively represents an after-tax interest cost of 4% per year for a tax payer in the 33% marginal tax bracket. But, the savings bonds pay 5% per year, which are equally taxed at 33%, leaving only an after-tax interest rate of 3.3% per year. Therefore, for each $100,000 in mortgage and savings bonds, the house owner throws away $667 in before-tax money (equivalent to $444 in after-tax money).