Dear Bob: Please explain how profits are calculated when real estate is sold. You recently saidprofit is the difference between the "adjusted sales price" and the "adjusted cost basis." I don't understand how the cost basis is calculated. Harlan E., Annapolis.
DEAR HARLAN: Let's start with the easy "adjusted sales price." That means the property's gross sales price minus sales expenses. For example suppose your home sells for $100,000 and you pay a $6,000 real estate sales commission and $1,000 transfer costs. Your adjusted sales price wold be $93,000.
"Adjusted cost basis" is more difficult. It is the sum of your purchase price, closing costs which were not tax deductible in the year of purchase, and capital improvements added during ownership. If you deducted any casualty losses or depreciation (for partial businees use ofyour home) during ownership, these amounts are subtracted.
For example, suppose you paid $40,000 for your home, had $1,000 of non-deductible closing costs at the time of purchase for title fee, attorney fee, escrow, and recording expenses. During ownership you added a $10,00 swimming pool and $5,000 for kitchen improvements.
Several years ago, you deducted a $900, casulty loss on your income tax returns. Over the years you've deducted $4,000 for depreciation of your basement office. Therefore your adjusted cost basis is $40,000 plus $1,000 plus $10,000 plus $5,000 minus $900 minus $4,000 which is 51,000.
Your sales profit in this example, is $93,00 minus $51,100 which is $41,900.
DEAR BOB: we are buying a home in Oklahoma, where they use warranty deeds. The agent explained to us that such a deed means the seller "warrants" that he owns the property, has not previously sold it to someone else, and that he owns good title. Then she said we should get a title insurance policy. If we get a waranty deed, do we need title insurance, too? Sue Ann A., McLean.
DEAR SUE ANN: Yes. Never acquire property without also buying an owner's title insurance policy. Such insurance protects against unexpected title risks such as forged signatures, liens, unpaid taxes, marital rights of previous owners, and many more.
A warranty deed is only as good as the person signing it. If he goes bankrupt and your waranty deed is defective, you've got nothing without title insurance.