Secondly, interest deductions are based on nominal interest. Some of that interest cost is simply compensation to the lender for inflation. That is to say, some of the interest is not a real cost but it has been tax deductible. For example, if inflation's running at 3 percent and the mortgage interest paid by an investor is 6 percent, then the real interest being paid by an investor is only the other half, the other 3 percent. In real terms at the end of the year, the investor only owed 97c adjusted for inflation. Yet investors have been getting a deduction for the full 6 percent interest charge. They get a deduction, effectively, for the inflationary component of their interest payment, but normally don't pay tax on either the real or nominal increase in the value of their asset upon sale. 