The state taxes citizens on their capital gains, which is to say that it levies a tax on profits due to the increase in value of capital goods, like real estate, precious metals, stocks, and bonds. For instance, if you bought a house for $100,000 and sold it four years later for $500,000, you might then, depending on your income level, be forced to pay a 20% tax on the $400,000 profit you made from that sale, which amounts to $80,000. The actual tax rate varies based on the length of time the asset was held, the current legal codes, and the seller’s tax bracket, but currently the rate sits between fifteen and twenty percent for most Americans.

Most assets don’t appreciate nearly as fast as the example I just gave, though. In fact, most assets don’t appreciate much at all. Some assets, like real estate, depreciate significantly over time unless money is continually spent on their upkeep and repair. So a more reasonable example might be that you bought a house for $200,000 in 1985, and you sold it for $600,000 in 2005. That means you’ll be paying capital gains taxes on the $400,000 increase in the sale price of your house.

The IRS does not take into consideration is the effect of inflation, however. If the value of money, in general, has dropped in the 20 years that you owned the house, that will account for a significant portion of the increase in your home’s price. That is, even if the housing market had not been booming in those twenty years, the price of your home–just like the price of everything else–would have risen dramatically due to the effects of inflation.

According to the Dept. of Labor’s numbers (which I believe underestimate the effects of inflation), the period from 1985 to 2005 showed nearly a 50% decrease in the value of money. So even without any actual capital appreciation, the house in our example could be expected to sell for $400,000, because that is the same value as it was purchased for once that price is adjusted for twenty years of inflation. The real capital appreciation is not $400,000 at all, but actually $200,000 in 2008 dollars.

Additionally, homeowners pay, on average, between 1-3% annually in home upkeep. So during the twenty years you owned that house, in order to prevent it from depreciating, you could have expected to pay an additional $100,000 in repairs and maintenance. The actual appreciation of the home, minus those costs, is not $200,000, then, but more like $100,000. But since the IRS does not take profit into consideration, but only nominal gains, they will tax you on the full $400,000.

At current capital gains tax rates, most Americans would have to pay $80,000 (20% of $400,000) on the sale of this house. So although it might look like you’re making a $400,000 profit, and getting to keep $320,000 of that, you’re actually only making a net of about $20,000 on the whole procedure.

$20,000 is not a lot of money. I mean, it is a lot, but it’s not remotely close to the $320,000 that the government would apparently like you think that you’re taking away from the sale. They are getting $80,000 from the sale, after all, and they didn’t have to invest 20 years to get it.

If you think that’s irksome, consider also that in the example above, the house actually did appreciate by $200,000 (in 2008 dollars) from its original purchase price). Imagine (and this doesn’t require any stretch), that the house did not appreciate so significantly, but rather stayed at roughly the same market value. It would still have gone up in nominal price, due to inflation, and it would still have required the same maintenance costs, but it would have only sold for $400,000.

In this new scenario, the nominal gain from the sale would be $200,000, and the government would levy a $40,000 tax on that “profit.” But that means the government is taxing you on gains from an asset that didn’t actually increase in real value. The only increase was from inflation, but that’s because everything went up in price. So you’re effectively being charged $40,000 for having owned a home for those twenty years. The longer you owned that home, the more inflationary, phantom gains you would be taxed on. Once you take into account the maintenance fees, you’re really looking at a $140,000 loss on your house, $40,000 of which the government takes for itself.

No wonder they always want to have more people owning homes. If you rented for that period, you might have paid $300,000 in 2008 dollars, and that’s more than the $140,000 loss for owning the house, but the IRS would not have gotten a cut after you finally moved out.