Taxable Income Overstated Because of Inflation

1. In 1976 we purchased a rental home.
2. On our 1989 Income Tax Return we deducted an allowance for depreciation of the house.

So Taxable Income for 1989 is derived as follows:

Taxable income for 1989 =

rental income etc... denominated in 1989 dollars

- taxes, insurance etc.. denominated in 1989 dollars
- wear and tear (depreciation) of house denominated in 1976 dollars.


Taxable Income is Overstated

The depreciation expense is denominated in 1976 dollars. This understates my expenses, thereby overstating my Taxable Income.