If I Sell My House, Can I Keep the Money?

Selling a home often leads to the question: “If I sell my house, can I keep the money?” While it is natural to consider the proceeds from a sale as entirely yours, the reality involves several financial considerations and deductions. These reduce the gross sale price before you receive any funds. This article will explain these components, providing a clear understanding of what a seller can realistically expect to retain.

Understanding Initial Deductions from the Sale Price

When you sell your home, two of the most significant deductions are paid directly from the sale proceeds at closing: the mortgage payoff and real estate agent commissions. Any outstanding mortgage balance must be paid in full at the time of sale, including the remaining principal and any accrued interest up to the closing date.

Real estate agent commissions are another substantial expense. These commissions compensate both the seller’s (listing) agent and the buyer’s agent for their services. Commission rates typically range from 5% to 6% of the home’s sale price, with the total often split between the two agents. For a home valued at $400,000, a 6% commission would amount to $24,000, illustrating their significant impact on the final proceeds.

Accounting for Closing Costs and Other Seller Expenses

Beyond the mortgage payoff and agent commissions, sellers incur various other fees and expenses at closing, known as seller-specific closing costs. These include title insurance, often paid by sellers to protect the buyer. Escrow or attorney fees, covering transaction services, also contribute.

Transfer taxes are imposed by state or local governments on property ownership transfer. These vary widely by location, from minimal flat fees to percentages of the sale price. Recording fees are also paid to record the new deed. Prorated property taxes and homeowner association (HOA) fees ensure each party pays their share based on their period of ownership.

Sellers might also agree to cover certain buyer closing costs or offer credits for repairs, known as seller concessions. These can include appraisal fees, loan origination fees, or prepaid property taxes for the buyer. Offering such concessions can make the home more appealing to buyers, but they directly reduce the cash amount the seller receives.

Calculating Your Net Proceeds

To determine the cash a seller receives, calculate the net proceeds. This begins with the home’s gross sale price. From this, subtract the outstanding mortgage payoff.

Next, real estate agent commissions are deducted. Finally, all other seller-paid closing costs and expenses, such as title insurance, escrow fees, transfer taxes, and prorated property taxes, are subtracted. The resulting figure is the net proceeds—the cash disbursed to the seller at closing. This amount represents the cash received from the transaction, before considering income tax implications on the profit from the sale.

Tax Implications of Home Sale Proceeds

The profit from selling a home is generally subject to capital gains tax, though tax rules provide a significant exclusion for primary residences. Profit or gain for tax purposes is calculated by taking the sales price, subtracting certain selling expenses, and then subtracting the adjusted basis. Selling expenses that reduce taxable gain include real estate agent commissions, legal fees, and transfer taxes.

The adjusted basis is your original purchase price plus the cost of any capital improvements made to the property. Capital improvements are upgrades that add value to your home, prolong its useful life, or adapt it to new uses, such as adding a room or a new roof. A higher basis reduces the calculated gain, potentially lowering your tax liability.

A primary residence may qualify for the Section 121 exclusion, allowing homeowners to exclude a substantial portion of the gain. Single filers can exclude up to $250,000 of gain, while married couples filing jointly can exclude up to $500,000. To qualify, you must have owned and used the home as your main residence for at least two years within the five-year period ending on the sale date. These two-year periods do not need to be consecutive.

If your gain exceeds these exclusion amounts, the excess is generally subject to capital gains tax rates, which vary depending on your income. In certain circumstances, such as health reasons or a change in employment, a partial exclusion might be available. If the home was ever used as a rental property, any depreciation claimed may be subject to “depreciation recapture” tax upon sale, taxed at a maximum rate of 25%.