CPI + Arithmetic = Inflation Rate

QUESTION: I own several rental units where the annual rent increase is based on the consumer price index. In the past, I simply picked up the Los Angeles Times at the end of the year and turned to the Trends in the Economy table. Listed there was the percentage change in the consumer price index from one December to the next. That figure was the amount by which the coming year's monthly rents were increased.

But earlier this year, The Times began listing an index instead of the percentage change for the consumer price index, and I cannot seem to find any way to convert this kind of figure to one that is useful for my purposes. Short of calling the U.S. Department of Labor every year, is there any way I can use this index to find my escalator?--J. A. S.

ANSWER: All it takes is a little arithmetic. Just subtract last year's figure from this year's and divide the difference by the year-ago number. That gives you the percentage change in the consumer price index, a measurement of the year's inflation.

With the actual index instead of just the percentage, you can also see how much a selection of consumer goods costing $100 in 1967 would cost you today. In September, the latest available figure, those goods would cost you $324.50, up from $314.50 in September, 1984. The consumer price index is updated once a month, but it is important to remember that doing the math using any monthly figure, except December's, gives you an annual percentage change for the latest 12 months--not the inflation rate for the year to date.

Take the September numbers. This September, the index stood at 324.5, up from 314.5 a year ago. Subtracting those two numbers gives you a difference of 10.0. Divide that figure by the 1984 number, 314.5, to get the percentage change: 3.2%. What that tells you is that inflation for the period between September, 1984, and September, 1985, was 3.2%. It doesn't tell you what inflation was for the first nine months of 1985.

To get the correct inflation figure for use as an escalator for rental properties, labor contracts and the like, you must compare the December index from one year to the next.

Q: You once wrote about an IRS informant program in which tipsters who help to recover unpaid federal income taxes are paid for their aid. Does the state of California do the same?--O. S.

A: The state will gladly accept any tips that you have on tax dodgers, but it won't pay you for your trouble. If you're interested in being a good citizen, albeit an unpaid one, send your information to the Franchise Tax Board, Informant Unit, Box 1468, Sacramento, Calif. 95807.

Q: My husband and I are over age 55 and have lived in and owned our home for 4 1/2 years. We want to sell it now. But we will hold off as long as necessary to get the profit excluded from taxation. We have seen references in your column to the IRS rules on qualifying for tax exemption of the gain. But you have mentioned both a three-year and five-year holding period, and we're confused.

We have never claimed the exemption before, so would we qualify?--J. A. R.

A: You meet all three IRS tests for excluding from your gross income up to $125,000 of gain on the sale of your home. You are age 55 or older, you have never before excluded home-sale profits and you have owned and lived in the house for at least three of the five years preceding the sale.

The required three years of ownership and use don't have to be continuous. You meet the test as long as you can demonstrate that you lived in and owned the house for at least 1,095 days out of the five years ending on the date of the sale of your home.

Short absences, such as vacations, count toward the 1,095 days even if you rent out the house during that period.

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