Q&A - Questions from our readers - Page 122 of 139

When you buy a home for close to nothing, how to you calculate profit on a home sale.

Most people buy their homes from strangers. When you buy or receive your home from a relative, you’ll have to figure out how to calculate the profit on the home sale. It’s not that easy and will take some head scratching to do.

Q. I purchased a condominium from my mother in 1997 for a small nominal fee. I had lived there for 10 years. My question is, if I sell the unit now, would I pay taxes based on the county’s appraised value in 1997, of which I am unaware, or do I pay taxes based on the purchase price from my mother that is stated on the deed transfer?

A: In a sense, you’ve answered your own question. When you told us that you purchased the condominium for a specific amount, your your purchase price was that nominal fee.

If that’s the case, you bought it for one price and you will sell it for another. The difference between the purchase price and sales price is your profit or loss.

Calculate Profit on a Home Sale

Of course, there are other factors that go into determining your actual profit on the property. You may have made improvements to the unit. You probably had costs relating to its purchase and you’ll likely have expenses relating to the sale. The tax you’ll pay will take into consideration what you paid for the home, major upgrades and improvements, and the costs of purchase and sale.

You need to consider the concept of a “nominal price.” Sometimes, people set up a buy and a sell with a nominal price when they really intend the sale to be a gift. Parents do this all the time. So which one was it? Was it a gift or a sale?

Let’s say the condominium was worth $100,000 when you purchased it, but you only paid your mother $1,000 in 1997. In this instance, it would seem that the sale was really a gift to you and not a real purchase and sale. When you receive a home as a gift from a parent, you step into your parents’ shoes when it comes to the home’s value. So, if she paid $50,000, you would receive the property at her purchase price of $50,000 and then may be able to add the $1,000 or nominal amount you paid your mother to her basis, to get your new basis of $51,000.

We don’t know why you and your mom would have structured the transaction this way. We have repeatedly told our readers that there is often a better way of transferring real estate, especially if you expect a profit on the sale.

Figuring out your cost basis for IRS purposes

Since you now own the unit, you’ll need to figure out what your total cost basis is. Either how much your mother paid for the property (if it was a gift) or the nominal amount you say you paid that was an actual purchase price. Then, add in any costs for major improvements or renovation projects. When you sell the condo, your profit is reduced by the amount of the sales commission and any other costs of sale plus the cost of purchase and the cost of those improvements.

The good news is that you live in your home as a primary residence. Even if you have a profit, the IRS allows you to exclude from federal income taxes up to $250,000 in profit. If you are married and sell your primary home, you won’t pay federal income taxes on the first $500,000 in profits. But the sale must be on your principal residence, as long as you’ve lived in the property for two out of the last five years. If you’re single, and sell the condo for $250,000 or less, you probably don’t have much to worry. However, if you sell it for more than $250,000, you’ll need to spend some time to figure out how much tax you’ll owe. Also, you should do your homework before you decide to sell your home.