Sold My House, Now What? Taxes and Next Steps

Selling a home is a major financial event. It involves understanding net proceeds, tax obligations, and how to best use the funds. This guide clarifies these financial considerations to help you make informed decisions.

Understanding Your Net Proceeds

Gross proceeds are the total amount a buyer pays for a property. Net proceeds are the actual money you receive after all deductions and expenses are accounted for.

Calculating net proceeds involves subtracting costs from the gross sale price. Major deductions include real estate commissions (5% to 6% of sale price) and other seller-paid closing costs. These include escrow fees, title insurance premiums, transfer taxes, and attorney fees, which vary by location.

Further deductions include outstanding mortgage balances, prorated property taxes, and homeowners’ association (HOA) fees. Seller concessions or credits negotiated with the buyer for repairs or closing costs also lower your net amount.

To determine net proceeds, review the Closing Disclosure (CD) or HUD-1 statement provided at closing. These documents itemize every financial transaction, including all debits and credits. They show how the gross sale price is allocated and confirm the amount you receive.

Navigating Capital Gains Tax

Understanding capital gains tax is important when selling real estate. A capital gain is the profit realized when an asset is sold for more than its adjusted cost basis. A capital loss occurs if the sale price is less than the adjusted basis.

To calculate capital gain, subtract selling expenses and the property’s adjusted basis from the sale price. Selling expenses include real estate commissions and other costs incurred during the sale. The adjusted basis is your original purchase price plus qualified home improvements and certain acquisition costs like abstract fees, recording fees, and surveys.

Internal Revenue Code Section 121 offers an exclusion for the sale of a primary residence. To qualify, you must meet both an ownership test and a use test. You must have owned the home and used it as your main residence for at least two of the five years leading up to the sale.

Under Section 121, single filers can exclude up to $250,000 of capital gain from their income, while married couples filing jointly can exclude up to $500,000. This exclusion applies only to your main home and cannot be used for investment properties, rental homes, or vacation residences. The exclusion can only be claimed once every two years.

Capital gains are categorized as either short-term or long-term, which impacts the tax rate. Short-term capital gains apply to assets held for one year or less and are taxed at ordinary income tax rates. Long-term capital gains are profits from assets held for more than one year and generally receive preferential tax treatment, taxed at rates of 0%, 15%, or 20% depending on your taxable income.

Higher-income taxpayers may also be subject to the Net Investment Income Tax (NIIT), an additional 3.8% tax on certain investment income, including capital gains from home sales that exceed specific income thresholds. Sellers should be aware of Form 1099-S, “Proceeds From Real Estate Transactions.” This form reports the gross proceeds from the sale to the Internal Revenue Service (IRS). If you receive one, you must report the sale on your tax return.

Strategic Use of Sale Proceeds

After understanding your net proceeds and potential tax obligations, the next consideration involves strategically allocating the funds from your home sale. The most effective approach depends on individual financial circumstances and long-term objectives.

One prudent use of proceeds is to pay down high-interest debt, such as credit card balances or personal loans. Reducing or eliminating these debts can significantly improve your financial health by freeing up monthly cash flow and reducing interest expenses.

Building or replenishing an emergency fund is another important step. Financial experts suggest maintaining an emergency fund equivalent to three to six months of living expenses. This fund acts as a safety net for unforeseen events like job loss, medical emergencies, or unexpected home repairs. Hold it in an easily accessible account, such as a high-yield savings account or money market account, to ensure liquidity without penalty.

For those planning to purchase another home, using the proceeds for a down payment is a direct application. A larger down payment can lead to a lower loan amount, lower monthly mortgage payments, and may help avoid private mortgage insurance (PMI). Strategies for saving for a new down payment include setting clear goals, budgeting effectively, and exploring high-interest savings options to grow the funds.

Investing for retirement or other financial goals is a forward-looking use of proceeds. Consider contributing to tax-advantaged retirement accounts like IRAs or 401(k)s, or establishing a taxable brokerage account. Hold unallocated funds in short-term, liquid options like high-yield savings or money market accounts for accessibility. Create a budget or financial plan to align their use with your objectives. Seeking guidance from a qualified financial advisor can provide personalized insights.