Why Capital Gains Must Be Protected from Inflation

If your employer gives you a 2 percent wage increase, and inflation is 3 percent, has your real income increased or decreased? Assume you bought a horse barn and 40 acres of land for $200,000 in 1988 for a riding school you operated. You have just retired from your business and sold the land and barn for $360,000. In the 30 years from the time you originally bought the property, the value of the dollar has fallen by about one-half due to inflation — so, rather than having a $160,000 gain from the sale of your property — in real (inflation-adjusted) dollars, you suffered a $40,000 loss.