REAL ESTATE MAILBAG

DEAR KASEN: Congratulations on your profitable "flipper" transactions. The only unfortunate part is that your profit is fully taxable as ordinary income because you did not hold title over 12 months to qualify for a long-term capital gain.

When calculating your adjusted cost basis, you include the purchase price and capitalize the closing costs that were not tax-deductible at the time of purchase. As for your carrying costs, such as mortgage interest, homeowners association dues, property taxes and monthly utilities, they should be deducted on Schedule E or C of your income tax returns.

As for determining your adjusted or net sales price, the real estate agent's sales commission and closing costs are subtracted from the gross sales price. Then subtract your adjusted cost basis from the adjusted sales price to determine your taxable ordinary gain.

DEAR BOB: My wife and I bought our home in May 2004 and have lived in it since then. If we sell now, can we avoid paying capital-gains tax on our sale profit? -- Walter B.

DEAR WALTER: If you sell your principal residence after less than 24 months of ownership and occupancy during the 60 months before its sale, Internal Revenue Code 121 says you are not eligible for tax-free profits up to $250,000 (up to $500,000 for a qualified married couple filing jointly).

However, you might be entitled to a partial exemption (75 percent in your situation) based on occupancy for 18 months.

To qualify for the partial exemption, your principal residence sale must be due to health reasons; change of employment location, which qualifies for the moving expense tax deduction; or unforeseen circumstances, such as divorce, death in immediate family, unemployment, multiple births from the same pregnancy, residence damage from natural or man-made disaster, and condemnation or involuntary conversion.

DEAR BOB: We own a rental house that we want to sell so we can acquire another rental property. We cannot sell until the lease expires in March 2006. However, we have already found another suitable rental property -- and the seller wants to close by November 2005. Can we do an Internal Revenue Code 1031 tax-deferred exchange?

-- Alvin D.

DEAR ALVIN: Yes. The situation you describe, in which the replacement rental property is acquired before the old rental property is sold, is called a "reverse tax-deferred exchange." It is perfectly legal under Internal Revenue Code 1031.

However, you can't take title to the replacement property in your name until you sell your current rental property. Title must be taken in the name of the third-party intermediary who will handle your IRC 1031 tax-deferred exchange. Consult a tax adviser for details.

DEAR BOB: My mom's part-time home health aide, a single mother who earns $9 an hour, wants to go back to school full time to become a registered nurse. She has asked my advice on selling or refinancing her townhouse so she can afford the tuition and living expenses. She and her former boyfriend bought the townhouse about seven years ago; both names are on the deed and the mortgage. He moved out about six years ago and told her she could keep the house. She has not been able to contact him. What does she need to do to get his name off the title and the mortgage? -- Fran A.