When You Sell a House, What Happens to the Money?

When a house is sold, the money exchanged undergoes a detailed financial process involving various deductions and payments before any funds reach the seller. This process begins with the agreed-upon sale price and accounts for numerous expenses and existing financial obligations tied to the property. Understanding each stage helps homeowners anticipate the true financial outcome of their sale.

Gross Sale Proceeds

The gross sale proceeds are the starting point for determining the financial outcome of a home sale. This figure represents the total amount for which the house is sold, as mutually agreed upon by the buyer and seller in the sales contract. It is the initial purchase price before any costs, fees, or outstanding debts are subtracted.

For example, if a home is sold for $400,000, this entire amount constitutes the gross sale proceeds. This negotiated price forms the basis for all subsequent calculations and deductions related to the sale.

Costs of Selling Your Home

Various costs incurred during the selling process are allocated from the gross sale proceeds. Real estate agent commissions are a substantial expense, commonly 5% to 6% of the home’s sale price. This commission is usually split between the buyer’s and seller’s agents and is paid by the seller at closing.

Beyond commissions, sellers pay a variety of closing costs. These include the seller’s portion of title insurance, which protects against defects in the property’s title, and escrow fees for managing transaction funds and documents. Attorney fees may apply in states where legal representation is customary or required.

Other closing costs include transfer taxes or documentary stamps, which are government fees on property ownership transfer, and recording fees for registering the new deed. Sellers may also incur costs for repairs or renovations to prepare the home for sale, such as staging or offering a home warranty to the buyer.

Prorated property taxes and homeowners’ association (HOA) fees are adjusted at closing. The seller is responsible for their share of these expenses up to the closing date, with the buyer assuming responsibility thereafter. These costs are itemized and deducted directly from the gross sale proceeds at closing.

Paying Off Existing Debts

Sale proceeds are used to satisfy outstanding financial obligations directly secured by the property. The most common is the existing mortgage, which must be paid off to transfer a clear title. The mortgage lender provides a payoff statement detailing the exact amount required, including the remaining principal balance, accrued interest up to the closing date, and any prepayment penalties or fees.

This payoff amount is directly remitted to the mortgage lender from the sale proceeds at closing. Other liens or debts attached to the property, such as a home equity line of credit (HELOC), a second mortgage, or mechanic’s liens, must also be satisfied from the sale funds. Clearing these obligations ensures the buyer receives the property free of encumbrances.

These debt payoffs are distinct from selling costs and represent obligations against the property that must be cleared for title transfer. The closing agent ensures all such debts are paid off before disbursing any remaining funds to the seller.

Calculating Net Proceeds and Taxes

After all selling costs and existing property-related debts are paid, the remaining amount represents the net proceeds the seller receives. This figure is calculated by subtracting the total selling costs and existing debt payoffs from the gross sale proceeds. The net proceeds are the funds available to the seller after the transaction is complete.

The sale of a home can also have tax implications, primarily concerning capital gains. A capital gain is the profit realized from the sale, calculated as the selling price minus the adjusted basis and selling expenses. The adjusted basis includes the original purchase price plus the cost of any capital improvements, such as additions or renovations.

Many homeowners benefit from the primary residence exclusion under Internal Revenue Code Section 121. This provision allows single filers to exclude up to $250,000 of capital gains from the sale of their main home, while married couples filing jointly can exclude up to $500,000. To qualify, the taxpayer must have owned and used the home as their main residence for at least two out of the five years preceding the sale.

If the capital gain exceeds these exclusion amounts, the excess portion is subject to long-term capital gains tax rates, which vary based on the seller’s income level. The real estate closing agent reports the sale to the IRS on Form 1099-S, “Proceeds From Real Estate Transactions.” Even if no tax is due due to the exclusion, the sale may still need to be reported on Schedule D, “Capital Gains and Losses,” of the seller’s federal income tax return.