You made $100,000 on your home sale. Are you richer?

2010 - You bought a home for $100,000 and your favorite sandwich costs $5.

10 years later…

2020 - You sell the home for $200,000 and your fav sandwich costs $10.

(1) Did you make any money?
(2) Did you increase your wealth? Are you richer?

Answers:
(1) Yes
(2) No

2010 - $100,000 is worth 20,000 sandwiches ($5/each)
2020 - $200,000 is worth 20,000 sandwiches ($10/each)

You made $100,000 dollars so you made 100,000 more money/dollars.
But you cannot buy more sandwiches. Your money still buys the same number of sandwiches: 20,000 sandwiches. Your wealth did not increase.

But you actually reduced your wealth because the gov't will tax you at maybe 20% on the dollar profit.
Your dollar profit is $100,000, which means you pay $20,000 in taxes. You're left with $180,000 which can buy 18,000 sandwiches.

Your wealth was reduced by 2,000 sandwiches, even though you had a dollar profit (after taxes) of $80,000.

It's the consequences of inflation (devaluation of the dollar).

Leave a Reply

Your email address will not be published. Required fields are marked *

Time limit is exhausted. Please reload the CAPTCHA.