What Are Home Sale Proceeds And How Are They Calculated?
Andrew Dehan4-Minute Read
January 13, 2021
If you’re considering selling your home, you want to know how much you can profit from the sale. Maybe your area has become more popular or you’ve significantly invested in remodeling your home. Calculating your sale proceeds is important to prepare yourself for buying a new home, tax purposes or if you’re really trying to profit, flipping cost estimates. To calculate your proceeds effectively, you need to include the costs of selling a house. This is where net proceeds come in.
Let’s talk about how to calculate your net proceeds, as well address some frequently asked questions around home sale proceeds.
How To Calculate Net Proceeds From A Sale
Calculating net proceeds from a sale involves subtracting all the costs from the sale price of the home. Each of these key parts need to be factored in to have an accurate calculation. Include the following:
- Home sale price: The price the buyer has agreed to pay you for your home.
- Fees paid to real estate agent: Seller pays the commission for both the buyer’s agent and the seller’s agent. The total commission is typically 5-6% of the home sale split between the agents.
- Cost of staging the home for sale: Whether it’s hiring a cleaning crew or investing in some throw pillows, chances are you will spend some money staging your home. Make sure to factor this cost in.
- Costs of repairs to sell home: Will you make any repairs or improvements to the home before selling it? These costs need to be considered.
- Seller concessions: When you sell your home, you may agree with the buyer to pay a portion of their expenses, typically at closing.
- Cost of a home ownership overlap: You may experience a scenario where you own both the house you just bought and the house you’re trying to sell.
- Closing costs: Closing costs typically include costs of title insurance, transfer tax and escrow money.
- Mortgage payoff amount: This is the amount you still owe on your mortgage.
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: $200,000
Fees paid to real estate agents: $12,000
Cost spent on staging: $300
Cost spent on repairs/improvements: $1,000
Closing costs: $6,000
Mortgage payoff amount: $135,000
Here’s it with the numbers plugged in:
200,000 - (12,000 + 300 + 1,000 + 6,000 + 135,000) = 45,700
So, in this example, your home sale proceeds equal $45,700. Keep in mind, we left out some costs like ownership overlap and seller concessions. Depending on your situation, the costs will change. Maybe you didn’t spend anything to stage your home, but you conceded to pay the buyer’s closing costs.
Now that we’ve covered how to calculate the proceeds, let’s cover some frequently asked questions.
Home Sale Proceeds Calculating FAQs
Here are some common questions and points of confusion around home sale proceeds.
Are Capital Gains The Same As Net 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.
How Is Capital Gains Calculated In A Home Sale?
In short, capital gains are calculated by taking the price you sold the home at and subtracting the price you paid for it. In a situation where you’re buying low, investing in improvements, then selling for a profit, the formula is a little more complex.
Say you paid $150,000 for a house to flip. You sunk $20,000 into repairs and improvements. This puts you $170,000 into the investment. We’ll refer to this as the “adjusted cost basis.”
You’re able to sell the home for $250,000. Subtracting the costs of the sale, which we’ll estimate at $15,000, your net proceeds are $235,000. Subtract your initial investment of $170,000 and your capital gains total for the flip is $65,000.
What Is Depreciation Recapture And Does It Differ From Capital Gains?
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 will likely have to pay capital gains tax on top of the depreciation recapture.
Do I Need To Worry About Paying The Capital Gains Tax?
Unless you’re profiting largely from the sale of your primary residence, you probably won’t have to pay capital gains tax. How large? For tax years 2020 and 2021, you can profit up to $250,000, or double that if you’re married, without having to pay capital gains tax. This only applies to your primary home.
In general, if you’re selling a second home for more than you paid for it, you will have to pay capital gains tax. This also applies to investment or rental properties you haven’t lived at. There are some exceptions, so do your research.
Are Net Proceeds The Same As Profit?
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. 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.
Table of Contents
The Cost Of Selling A House Explained
There are lots of costs associated with selling a house. Check out our list of these costs, what they’re for, and how to minimize them when it’s time to sell.
How To Sell Your Home Without Paying Capital Gains Tax
Capital gains tax can put a serious dent in profits from a home sale. Our guide can help you determine what qualifies for a tax exemption.