Q: In 1966, I paid about $43,000 for a townhouse. In 1994, an identical model of the same age sold for $130,000. I haven't looked up inflation in the consumer price index over this period, but assuming it was about 3 percent per year compounded annually, then $1 would be about $2.29 -- or my $43,000 would now be about $98,500. But it would appear that Internal Revenue Service in the above case would rule that my capital gain was about $87,000. Can you clarify or confirm?
A: At the present time, our tax laws do not take inflation into account in assessing capital-gains taxes. However, many people seem to forget that these tax laws are legislated and enacted by Congress and only enforced by the IRS. So put the blame where it belongs.
Now back to your question: From 1966 to 1993, the compounded annual inflation rate was 5.6 percent. In fact, $43,000 in 1966 would have had to have grown to $187,222 just to keep its purchasing power. So in reality, the $130,000 price represents a loss of purchasing power.
And yes, when you sell, you will theoretically owe capital-gains taxes on your final selling price, minus your purchase price, minus any capital improvements you've made.
In reality, the sale of your home entitles you to a number of tax breaks. If you reinvest in a house of the same or higher value within two years of selling the old one, taxes are deferred. And after age 55, you do get a once-in-a-lifetime exclusion of $125,000 of capital gains.
However, when it comes to stocks, bonds or other securities, the only tax "break" is the current 28 percent federal tax ceiling on long-term capital gains.
If you bought a gold coin in 1966 for $43 and sold it today for $187, you'd be just about even on inflation before taxes. After taxes, you wouldbe at least 28 percent behind.
With our current astronomical federal deficit, the government can't possibly afford to index capital gains to inflation. The revenue loss would be too great.
However, I believe that lowering the capital-gains tax rate would be a great boon to our citizens and our economy. Most likely, it would also create a windfall for our Treasury.
Susan Bondy founded her namesake financial services company 1980. Write to Susan Bondy in care of The Sun, 501 N. Calvert St., Baltimore, Md. 21278.