91 Areas Included in Monthly CPI

QUESTION: Most of us are aware that the consumer price index is a weighted sum of food costs, utilities, housing, etc. What I do not know is precisely what these weights are and if there is data available correcting for such things as geographical location. For example, it seems to me that a big factor is whether one is renting or buying a home, and where that home is located. How is that handled in the index?--J. A.

ANSWER: According to Patrick Jackman, chief of the consumer price index branch of the Bureau of Labor Statistics, the CPI is calculated each month by averaging the results of regional “market basket” surveys conducted in 91 major metropolitan areas throughout the nation. The surveys record the prices of a variety of goods and services in seven major categories: food and beverages; housing; apparel; transportation (both public and private); health care (which includes only out-of-pocket costs, not any covered by insurance); entertainment, and “other,” a catchall category that includes education, legal and a variety of minor items.

The categories are necessarily broad and include a variety of items. For example, the housing group includes both the prevailing prices of rental apartments and houses as well as homes for sale. In addition, this category includes the cost of home furnishings, utilities, insurance and other expenses relating to shelter.

The weighting of these categories changes periodically, depending on their relative bite into the consumer’s pocketbook. As of December, 1987, the CPI was apportioned as follows: food and beverages, 17.6%; housing, 42.5%; apparel, 6.3%; transportation, 17.5%; medical care, 5.8%; entertainment, 4.4%, and other, 5.9%.

Over the years, Jackman says, there have been suggestions that the bureau create a special CPI for the elderly because their spending patterns tend to differ from those of the general population. But he notes that bureau studies showed that, over a period of several years, the changes in the cost of living for both young and older Americans tended to be about the same.

There are, however, regional versions of the CPI, and in some areas salaries covered by labor contracts are based on a local index rather than the national one. The differences among the regions surveyed can be significant. For example, in January, the CPI increased 4% nationwide from January, 1987. But in Los Angeles, the increase was 4.9%; in Chicago, it was 3%, and in New York, it was 5.8%.

Q: I was awarded the house in my divorce. We had paid $155,000 for it and I sold it for $172,000. I then bought a house with my fiance for $226,000. Do I have to pay capital gains taxes since my share of the new house is only $113,000? --R. N.

A: Yes, you are liable to pay taxes on your gain from the sale of your first house. The only question is: What amount is subject to taxation? Our experts are divided.

Shirley Nakagawa of the Internal Revenue Service in Los Angeles says you must report a taxable gain of $17,000 ($172,000 minus $155,000), a figure that assumes no closing costs or other sales fees that would reduce your actual profit.

Here’s her reasoning: You are selling your first house--which, due to your divorce settlement, you own entirely--for $172,000 and repurchasing half a house for $113,000. Since you are, in effect “trading down,” the $17,000 profit you made on the sale of your first house is fully taxable, Nakagawa says.

Robert Brown, a Woodland Hills accountant and leader of the Los Angeles branch of the Certified Public Accountants Assn., vigorously disputes Nakagawa’s analysis. According to his reading of the applicable laws, you are liable to pay taxes on a maximum of $8,500.

Here’s his reasoning: Your tax basis in the original house is $77,500, or half of the purchase price, and you have carried over that amount to your new residence by buying something at a higher price, namely $113,000. However, Brown says you are still potentially liable to pay taxes on the $8,500 gain you realized from the sale of your ex-husband’s half of the house. Brown reached the $8,500 figure by subtracting your ex-husband’s half of the basis, $77,500, from his half of the sales price, $86,000.

The difference in the two analyses, Brown says, is that the IRS argues that you are trading an entire house for half a house, while he claims that you are trading half for half and are liable for taxes on your ex-husband’s share. “The IRS says she is moving down, but I say she is moving up,” Brown argues. Brown refers you to Section 1034(g) of the Internal Revenue Code for more information. And he urges you to persuade your fiance to sign a consent form stating that he does not object to your carrying forward your $77,500 basis--and not getting a $113,000 basis--for the house you are buying together.

In last week’s column, G. B. asked if he could consider his five individual retirement accounts as a single unit and withdraw the required minimum disbursements from only one rather than each individual account. The Money Talk response was that he had to withdraw the required minimum disbursement from each account.

Last Monday, the IRS announced a change in its IRA disbursement rules. Under Notice 88-38, the IRS now says that G. B. and other multiple IRA holders like him may take the total minimum withdrawal from any one or more of their IRA accounts. This means that multiple account holders may determine the minimum disbursement from each IRA account, add them up and withdraw the total from any account or accounts of their choosing. The rule applies at least through 1988.