Can I Sell My House and Keep the Money?

When you decide to sell your home, the idea of ‘keeping the money’ from the sale might seem straightforward. However, the process involves various financial considerations that can significantly impact the actual net proceeds you receive. Factors ranging from direct selling expenses to outstanding debts and potential tax implications all play a role in determining the final amount you walk away with.

Costs of Selling Your Home

Selling a home involves several expenses that directly reduce the gross sale price. One of the most significant costs is real estate agent commissions, which typically range from 5% to 6% of the home’s sale price, usually split between the listing agent and the buyer’s agent. These commissions are generally paid at closing from the sale proceeds.

Beyond agent commissions, sellers incur various closing costs. These can include transfer taxes, which are fees imposed by local governments for transferring property ownership. Other common closing expenses include title insurance, which protects the buyer against title defects, and escrow or settlement fees, covering the services of a neutral third party managing the transaction.

Sellers also frequently face expenses for preparing the home for sale. This might involve costs for home inspections, necessary repairs identified during inspections, or professional staging to enhance the property’s appeal. While these are not technically “closing costs,” they are out-of-pocket expenses incurred to facilitate the sale. All these various fees and costs collectively contribute to the overall selling expenses, which can typically amount to 6% to 10% of the home’s sale price, including agent commissions.

Mortgage and Lien Payoffs

A substantial portion of your home sale proceeds will be allocated to repaying any outstanding debts secured by the property. This primarily includes the remaining balance of your mortgage loan. The closing agent or title company will ensure that the mortgage is fully satisfied at closing, directly deducting the amount from the sale proceeds.

Similarly, any home equity loans or lines of credit (HELOCs) against the property must also be paid off. These are considered liens on the property, and clearing them is a necessary step to transfer clear title to the new owner. Other types of liens, such as tax liens for unpaid property taxes or mechanic’s liens for unpaid contractor work, would also need to be resolved.

It is important to understand that these payoffs are not additional “costs” of selling your home. Instead, they represent the repayment of existing liabilities that were tied to the property. The closing agent handles these transactions, ensuring that all secured debts are cleared before the remaining funds are disbursed to you. This process ensures that the buyer receives the property free and clear of these financial encumbrances.

Capital Gains Exclusion Rules

When you sell your primary residence, you may qualify for a tax benefit known as the Section 121 exclusion, which allows you to exclude a certain amount of capital gain from your taxable income. This exclusion is designed for homeowners selling their main home, not investment properties or vacation homes. To be eligible, you must meet both an ownership test and a use test.

The ownership test requires that you have owned the home for at least two years during the five-year period ending on the date of the sale. The use test mandates that you must have lived in the home as your primary residence for at least two years during that same five-year period. These two-year periods do not need to be consecutive; they can be any combination of 24 months within the five-year timeframe.

For single individuals, the maximum amount of gain that can be excluded from income is $250,000. For married couples filing jointly, this exclusion doubles to $500,000. This exclusion can only be claimed once every two years. If your gain exceeds these amounts, the excess portion may be subject to capital gains tax.

Calculating Your Taxable Gain

Determining if you have a taxable gain after considering the capital gains exclusion involves a few key calculations. First, you need to establish your “adjusted basis” in the home. This is your original purchase price, plus the cost of certain improvements you made over the years, such as additions, renovations, or significant upgrades that add value or prolong the home’s life. Certain closing costs incurred when you bought the home, like title fees or legal fees, can also be added to your basis.

Next, calculate the “amount realized” from the sale. This figure is the gross selling price of your home minus certain selling expenses. These deductible selling expenses include real estate agent commissions, legal fees, advertising costs, and escrow or settlement fees. By subtracting these costs from the sale price, you arrive at the net amount you effectively received from the sale.

Your gain on the sale is then determined by subtracting your adjusted basis from the amount realized. If the amount realized is greater than your adjusted basis, you have a capital gain. Once you have calculated this gain, you can apply the Section 121 exclusion discussed previously. Your taxable gain will be the total gain minus the applicable exclusion amount ($250,000 for single filers, $500,000 for married filing jointly), if you meet the eligibility criteria.