Andrew Dehan4-Minute Read
UPDATED: May 23, 2023
Current homeowners are looking at the prolonged seller’s market that the U.S. housing market has been in and wondering if now’s the time to jump in and sell their home. Those who decide to sell may find themselves asking one big question: “How much money can I expect to clear on the sale of my house?”
If you’ve been paying attention to the current real estate market, you know that housing inventories are down and sellers are fielding multiple offers well over asking price for their homes. Of course, if you're considering selling your home, you’ll want to know how much you can profit from the sale.
Calculating your sale proceeds is important as you prepare for buying a new home, for tax purposes or if you're an investor selling an investment property. However, it’s not just a simple matter of subtracting what you paid for your home from your ultimate sales price. You’ll have to pay off your current mortgage, unless you already have, and you’ll incur the substantial costs of selling the house.
Let’s look at all you’ll need to consider when evaluating how much cash you’re likely to walk away with.
Calculating net proceeds doesn’t require a complicated home sale calculator. Basically, you just need to subtract all the costs from the sale price of the home:
Sale price of the home − mortgage payoff amount − costs = net proceeds
Each of these key parts need to be factored in to have an accurate calculation. Include the following:
To calculate your net proceeds from the sale, take your home’s sale price and subtract your other costs. Let’s map out an example with some actual numbers:
Home sale price: $300,000
Commissions paid: $15,000
Cost spent on staging: $1,500
Cost spent on repairs/improvements: $5,000
Closing costs: $9,000
Mortgage payoff amount: $135,000
Here it is with the numbers plugged in:
$300,000 − ($15,000 + $1,500 + $5,000 + $9,000 + $135,000) = $134,500
So, in this example, your home sale proceeds equals $134,500.
Now that we’ve calculated the home sale proceeds, the next question is whether capital gains taxes are owed on those proceeds. The capital gains tax is the tax paid on the appreciation of an owned asset. Let’s continue this example by considering whether you’ll face a tax bill on your proceeds.
To figure out whether there are capital gains taxes owed, we need to know how much the owner paid for the house and whether they’ve renovated.
Let’s assume you bought your house for $200,000. Let’s also assume that you completed capital improvements to the home totaling $50,000.
With this information, the calculation is very straightforward:
Purchase price + capital improvements = $200,000 + $50,000 = $250,000
This means that, for tax purposes, the appreciation subject to capital gains is:
Sales price − adjusted cost basis = $300,000 − $250,000 = $50,000.
Does this homeowner owe capital gains taxes? Probably not, if this is their primary residence, generally defined as the place where the owner has primarily lived for 2 out of the last 5 years. Check with your tax advisor to make sure you follow all the rules regarding the sale of your home.
Tax law includes a lifetime exclusion of $250,000 (or $500,000 for married couples filing jointly) of capital gains on the sale of a primary residence. Let’s assume this owner is single, has lived in the home for the last 3 years and meets all other IRS requirements. They’ll use $50,000 of their lifetime exclusion and pay no capital gains tax. When they sell their next home, they will have $200,000 of the exclusion available to them.
Here are some common questions and points of confusion around home sale proceeds.
The short answer is no. Capital gains in real estate occur when you buy a home and sell it later for a higher price. Let's take a look at the example we broke down above. Say we originally bought that home for $175,000, then sold it for $200,000. The capital gains on the investment here is $25,000.
This differs from the net proceeds which is the amount you sold your home for, minus your costs. If you're flipping the house, you may use a different formula. For that breakdown, read the next question.
If the home you’re selling is not your primary residence, you’ll probably owe the capital gains tax. Going back to our example above, the owner would have to pay either 0%, 5% or 20% on their $50,000 of taxable capital gains, depending on their tax bracket.
However, one strategy that owners of two or more homes often utilize is to sell a primary residence first, and then move into the secondary residence for 2 of the next 5 years, making it their primary residence and then using what’s left of their exclusion when they sell their vacation home.
Another strategy to consider is renting out the vacation home and treating it as an investment property. Investors have additional options when it comes to deferring capital gains.
There is no capital gains exclusion on the sale of investment property. However, investors can consider using a Section 1031, or like-kind, exchange to defer capital gains taxes indefinitely. This means that when an investor sells an investment property and use the proceeds to buy another investment property, taxes are deferred until the second property is sold, or if the investor dies, their heirs inherit the property at its fair market value at the time of the investor’s death. If the heirs sell the property, they’ll incur very little in tax liability because of this step-up in basis.
Section 1031 exchanges can be complicated and must conform to a strict timetable. It’s best to work with your tax professional to make sure you comply with IRS regulations.
Depreciation recapture occurs on the sale of an investment or rental property. If your property goes down in value (depreciates), you can deduct it on your taxes. Each year the property depreciates, the IRS records its loss of value and calls this the “adjusted cost basis.”
If you sell your property at a higher price than the adjusted cost basis, the IRS requires you to pay a depreciation recapture rate on the sale. If you sell at a higher price than what you paid for the property, you’ll likely have to pay capital gains tax on top of the depreciation recapture.
No, they aren’t. While net proceeds refers to the total revenue after you subtract your costs of selling the home, profit refers to further subtractions. After you determine your net proceeds, your profit is calculated by subtracting other costs, like labor, transportation and financial fees. Profit is always less than or equal to net proceeds.
Whether you’re selling a home you’ve had for years or you’re flipping a house, it’s important to know how to calculate your net proceeds. Looking at profits without taking taxes into account can land you a big tax bill.
Getting ready to sell your home? Read our comprehensive guide on what to expect.
Whether you’re selling a home you’ve had for years or you’re flipping a house, it’s important to know how to calculate your net proceeds. Remember, net proceeds is the sale price of your home, minus the expenses to sell, like real estate agent commission and your mortgage payoff.
If you’re selling investment properties, understanding the difference between net proceeds, capital gains and profit is essential to running your business. You also need to research the tax implications of capital gains and property depreciation.
Want to learn more about homeownership or real estate investment? Explore more articles like this on the Rocket Homes® blog.
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