Calculating Home Sale Proceeds Without A Calculator

With how strong the US housing market has been in a seller's market, many homeowners are unsure if it's the right time to list their house for sale. One question that may cross the minds of potential sellers is, "How much money can I expect to clear on the sale of my house?"

What Are Home Sale Proceeds?

If you've been following the current real estate market, you're aware that there are fewer homes on the market and that sellers are receiving numerous offers for their properties that are significantly more than their asking price. Naturally, you'll want to know how much money you stand to make when you sell your house.

When you get ready to buy a new house, for tax reasons, or if you're an investor selling an investment property, it's crucial to figure out the proceeds from your sale. But it's more complicated than merely deducting your initial house purchase price from the final sales price. If you haven't already, you'll need to pay off your present mortgage in addition to the high selling fees.

Here's a few things to consider when thinking about how much cash you'll walk away with after the sale of your home.

How to Calculate

Calculating net proceeds doesn’t require a fancy home sale calculator. 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

These are the key parts that need to be factored in for calculation:

• Home sale price: The agreed upon sale price per the contract.
• Fees paid to Agents: The total commission is typically 5 – 6% of the home sale split between the agents and most commonly paid by the seller
• Staging Home Costs: You’ll spend some money staging your home. This could be investing in new decor or a cleaning crew
• Repair Costs: Any repairs or improvements need to factored in
• Seller Concessions: In the contract, the buyer may pay a portion of the seller's expenses, typically at closing.
• Home ownership overlap: You may experience a situation where you own both the house you’re trying to sell and the house you just bought.
• Closing costs: Costs of title insurance, transfer tax and escrow money.
• Mortgage payoff amount: The amount you still owe on your current home.

To calculate your net proceeds from the sale, take your home’s sale price and subtract your other costs. Here's 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.

Capital Gains Tax

After determining the proceeds from the property sale, the next thing to consider is whether capital gains taxes need to be paid on those gains. The tax paid on the increase in value of an owned item is known as the capital gains tax. In keeping with this example, let's think about whether you'll have to pay taxes on your earnings.

Adjusted Cost Basis

To determine whether there are capital gains taxes owed, we need to know the price owner purchased the house for and if 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.

Primary Residence Exclusion

Is there capital gains tax due by this homeowner? Most likely not, if this is their principal abode, which is commonly understood to be the location where the owner has lived for two of the previous five years. Make sure you follow all the regulations for the selling of your house by consulting with your tax expert.

Tax law provides a lifetime capital gains exclusion on the sale of a primary house of $250,000 (or $500,000 for married couples filing jointly). Assume for the moment that the owner is single, has been in the house for the previous three years, and satisfies all other IRS standards.

FAQs About Home Sales

Are Net Proceeds And Capital Gains The Same Thing?

No, is the succinct response. In real estate, capital gains happen when you purchase a property and then sell it for a bigger sum of money. Let's examine the case that we dissected earlier. Let's say we paid $175,000 for the house when we first bought it and $200k when we sold it. This investment has a $25,000 capital gain.

This is not the same as the net proceeds, which is the price you received for your house after deducting your expenses. A separate formula might be used if you're flipping a house. See the following question for that breakdown.

What If The Home I’m Selling Is An Investment Property?

There is no capital gains exclusion on the sale of investment property. Investors can consider using a Section 1031 or like-kind, exchange to defer capital gains taxes indefinitely. When an investor sells an investment property and uses 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 minimal in tax liability because of this step-up in basis.

Section 1031 exchanges can be complicated. They also conform to a strict timetable. It’s best to work with your tax professional to make sure you comply with IRS regulations.

What is Depreciation Recapture, And Does It Differ From Capital Gains?

Recapture of depreciation happens when an investment or rental property is sold. You can write off any depreciation on your property when you file your taxes. The IRS tracks the property's value loss annually and refers to this as the "adjusted cost basis."

The IRS compels you to pay a depreciation recapture rate on the sale of your property if the sale price exceeds the adjusted cost basis. In addition to depreciation recapture, you may be required to pay capital gains tax if the sale price exceeds the purchase price of the property.

Are profits and net proceeds the same thing?

They are not, that is for sure. Profit is the amount left over after deducting the costs of selling the house, whereas net proceeds is the entire revenue after those deductions. Your profit is computed by deducting additional expenses such as labor, transportation, and financial fees from your net revenues. Profit is never equal to or less than net proceeds.

The Bottom Line: To maximize your home sale proceeds, you'll need to do some tax planning.