How Much of a Home Sale Do You Keep?

Selling a home can be a significant financial event. While the sale price might seem like a substantial sum, various costs, fees, and potential tax implications reduce the final take-home figure. Navigating these financial aspects allows a seller to accurately forecast their net proceeds and avoid unexpected reductions.

Costs Reducing Gross Proceeds

One of the most substantial costs involves real estate agent commissions, which typically range between 5% and 6% of the home’s sale price, shared between the buyer’s and seller’s agents. This amount is customarily paid by the seller from the sale proceeds.

Beyond commissions, sellers typically incur various closing costs. These can include title insurance, and escrow fees for the neutral third party managing the transaction. Transfer taxes are often imposed by state or local governments on the transfer of property ownership and can be a percentage of the sale price. Attorney fees may also apply, and recording fees are paid to officially register the new deed. Sellers are also responsible for prorated property taxes up to the closing date.

Preparing a home for sale can also involve significant expenses, often undertaken to enhance marketability and appeal. These pre-sale preparation costs might include professional staging to showcase the property’s potential, minor repairs identified during inspections or to improve aesthetics, and thorough cleaning services. Professional photography is also a common expense, providing high-quality visuals for online listings.

Finally, a primary deduction from the gross proceeds is the mortgage payoff. If there is an outstanding loan on the property, the principal balance, along with any accrued interest up to the closing date, is paid directly from the sale proceeds. This ensures the title is cleared for the new owner.

Understanding Capital Gains Tax

After accounting for direct selling costs, potential tax liabilities, particularly capital gains tax, significantly influence the final net proceeds from a home sale. Capital gains tax applies to the profit realized from selling an asset, including real estate. To determine this profit, sellers first need to calculate their adjusted basis in the home.

The adjusted basis begins with the original purchase price of the home and includes the cost of any significant improvements made over the years, such as additions, major renovations, or system upgrades. It is important to distinguish these improvements from routine repairs, as only improvements that add value or prolong the home’s life are typically added to the basis. If any part of the home was used for business or rental purposes, depreciation previously claimed on that portion would reduce the adjusted basis.

Once the adjusted basis is established, the capital gain is calculated by subtracting the adjusted basis and the selling expenses from the sale price. Selling expenses, such as real estate commissions and certain closing costs, directly reduce the amount of gain. For example, if a home sold for $400,000 with $20,000 in selling expenses and an adjusted basis of $250,000, the capital gain would be $400,000 minus $20,000 minus $250,000, resulting in a $130,000 gain.

A significant tax benefit for homeowners is the primary residence exclusion under IRS Section 121. This rule allows qualifying individuals to exclude a substantial portion of the capital gain from their taxable income. Single filers can exclude up to $250,000 of gain, while married couples filing jointly can exclude up to $500,000. To qualify for this exclusion, the seller must meet both an ownership test and a use test.

The ownership test requires the seller to have owned the home for at least two of the five years preceding the date of sale. The use test mandates that the seller must have lived in the home as their main residence for at least two of the five years preceding the sale. Crucially, these two-year periods do not need to be continuous, and the ownership and use tests can be met during different two-year periods within that five-year window. However, the exclusion can generally only be used once every two years.

If the gain exceeds the exclusion amount, the remaining portion is subject to long-term capital gains tax rates, assuming the home was owned for more than one year. These rates are typically 0%, 15%, or 20%, depending on the seller’s taxable income level. For instance, individuals with lower taxable incomes may qualify for the 0% rate, while those with higher incomes will face the 15% or 20% rates. Short-term capital gains, from assets held for one year or less, are taxed at ordinary income tax rates, which are generally higher. Beyond federal taxes, some states and local jurisdictions may impose their own capital gains taxes or additional transfer taxes, further impacting the final tax liability.

Calculating Your Final Net Proceeds

To calculate final net proceeds, begin with the gross sale price. From this, subtract all direct selling costs, including real estate agent commissions, closing costs, and pre-sale preparation expenses. Next, deduct the mortgage payoff, which covers any outstanding loan balance and accrued interest.

Finally, determine and subtract any capital gains tax liability. This involves calculating the capital gain (sale price minus selling expenses and adjusted basis) and applying the IRS Section 121 primary residence exclusion (up to $250,000 for single filers, $500,000 for married couples). If a taxable gain remains, apply the appropriate long-term capital gains tax rate. The final net proceeds are the amount the seller receives after all obligations, expenses, and taxes are settled.