Wednesday, November 30, 2005

No Basis Increase for Inflation????

Apparently not. So here's the problem: Say you buy some property in 1950 for $50,000. In 2005 you want to sell the property for its current fair market value of $250,000. If you sell the property you will be taxed on the gain (sale price - basis), which is $200,000. However, although it looks like the value of the property has increased $200,000, inflation has increased dramatically over the past 55 years. The consumer price index in 1950 was 23.5. In 2005 the index was 190.7. Assuming that I'm not mistaken about how the CPI works, this means that the initial $50,000 is equivalent to over $400,000 in today's dollars. Thus you will actually realize a $200,000 loss on the transaction. Yet in addition to your massive loss, you will also have to cut a check to the IRS for the tax on your $200,000 "gain." Clearly this is the wrong treatment, But its the law.

Says William Andrews in Basic Federal Income Taxation: "The House of Representatives once passed a general basis indexing provision, but none has yet found its way into the law." Write your Congressman today.


Blogger scarlet panda said...

Finally, a tax issue on which my dad and I can agree. This is bizarre and outrageous.

10:19 PM  

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