Advanced Diploma of Financial Planning (ADFP) Practice Test

Why is price appreciation appealing to investors?

1. Because it guarantees future income

2. Because it is taxed immediately

3. Because it remains untaxed until recognized

4. Because it is easier to calculate than dividends

The correct answer is: Because it remains untaxed until recognized

Price appreciation is appealing to investors because the gains from the increase in an asset's value are typically not taxed until the asset is sold and the profit is realized, a process known as capital gains taxation. This means that investors can hold onto an appreciating asset without incurring tax liabilities in the interim, allowing for the potential for significant growth in their investment without immediate tax consequences. This characteristic makes price appreciation a favorable option for long-term investment strategies, as it allows investors to maximize their returns over time before triggering any tax obligations. In contrast, other options may imply immediate costs or complications that do not align with the advantages of price appreciation, such as guarantees of income or complexities in calculating returns.