I shouldn’t sell now – after all I’ll lose money since prices have dropped in the last year. RIGHT?

The math of whether you will make or lose money on the sale of your home is a simple calculation. Sometimes we complicate it with emotional issues that muddy the whole thing.

Here’s how it works. The price you paid for you home + any capital improvements you made equals your basis. Capital improvements are things like remodeling the kitchen, adding a deck, finishing a family room, etc. Take the basis and subtract it from the probable net selling price and you have the profit (or loss).

Hypothetical example:*

• You paid $200,000 for your home in 2001.
• You made $20,000 in improvements. Therefore your basis is $220,000.
• You are being offered $295,000 for your home.
• After Closing costs, Legal fees and Real Estate fees, you might net about $275,000.
• Subtract $220,000 from $275,000 and you will see that your profit is $55,000.

Here’s where it’s easy to muddy it up in your mind. 2 years ago you were told that you probably could get $340,000 for your house. (Net would likely be around $320). The temptation is there to subtract $275,000 from $340,000 and decide that you will be losing $65,000.

Here's what you have to keep in mind. What the value of your home would have been had you sold it last year or the year before is mathematically irrelevant.

The fact is – you didn’t sell it then – you are selling it now. The value of your home today, less what you paid is how to determine the profit.

There are certain situations where you might actually show a loss in these calculations but it's still based on facts - not feelings. If you purchased your home in the latter part of 2005 or early 2006, you may indeed have bought at the top of the appreciating market and you will see a loss when you do the calculations.

If this is your situation, you have to have a frank discussion with yourself and decide how important it is to move right now. If you do decide to move anyway, keep the good news in mind. While the real estate market is intensely local and things vary from community to community, it is entirely possible that whatever depreciation you are experiencing will also exist in the community where you want to buy.

*The numbers and calculations in this example are just to demonstrate a process and should not be construed to represent any predictions of profitability on any particular property.