When You Sell a House Where Does the Money Go?

When selling a house, the gross sale price is not the final amount a seller receives. Instead, it is the starting point from which numerous costs, fees, and obligations are settled. The financial journey involves stages from the buyer’s initial payment through deductions to the seller. This process ensures all parties are compensated and outstanding debts are cleared.

Initial Handling of Sale Funds

When a buyer commits to purchasing a home, their payment does not go directly to the seller. Instead, funds are deposited into an escrow account. An escrow agent, a neutral third party, manages this account. This arrangement protects both buyer and seller, ensuring funds are not disbursed until all sale contract conditions are met. The escrow agent holds the buyer’s earnest money deposit and the full purchase price until the transaction is completed.

The purpose of this holding is to guarantee all contractual obligations, such as inspections, appraisals, and securing financing, are satisfied. The escrow agent also manages necessary documents, ensuring they are properly signed and executed. Once all conditions are fulfilled, the agent disburses the funds to the appropriate parties, including paying off existing liens and distributing the seller’s proceeds.

Deductions from the Sale Price

The gross sale price of a home is subject to numerous deductions, which reduce the amount the seller ultimately receives. These deductions cover a range of services, fees, and outstanding obligations associated with the property transfer. Sellers can expect these costs, including agent commission and seller fees, to range from 8% to 10% of the home’s sale price. This amount is subtracted from the sale proceeds at settlement, rather than being paid out-of-pocket by the seller.

Real estate commissions are a substantial deduction, compensating both the seller’s listing agent and the buyer’s agent. Total commissions range from 5% to 6% of the home’s sale price, which can vary and is negotiable. For example, a 6% commission on a $400,000 home would amount to $24,000, split between the two agents. While traditionally the seller paid both agents’ commissions, recent changes mean the buyer is now responsible for compensating their own agent unless otherwise negotiated. Sellers can still offer compensation to the buyer’s agent, but it is now negotiated upfront and cannot be listed on a multiple listing service (MLS).

Any outstanding mortgage, home equity line of credit (HELOC), or other liens on the property must be paid off directly from the sale proceeds. Before closing, the seller’s lender provides a payoff statement detailing the amount needed to settle the loan, including principal, interest, and fees. This ensures a clear title can be transferred to the buyer. If the home’s sale price is less than the amount owed, the seller may need to bring additional funds to closing to cover the difference.

Beyond commissions and loan payoffs, sellers incur various closing costs. Title insurance, specifically the owner’s policy, is paid by the seller in many markets and costs around 0.5% of the sales price. Escrow or attorney fees for managing the transaction and documents can range from $200 to 0.5% of the purchase price. Recording fees are also paid to the local government to officially register the transfer of ownership.

Transfer taxes, also known as stamp duties or conveyance taxes, are imposed by state or local governments on the transfer of property title. These taxes are a common seller-paid closing cost, which vary by jurisdiction. Property taxes and homeowners’ association (HOA) fees are prorated at closing. Proration means these expenses are divided between the buyer and seller based on their period of ownership up to the closing date, ensuring each party pays their fair share. For instance, if property taxes are paid in arrears, the seller will give the buyer a credit for the portion of the tax period they owned the home.

Seller concessions or credits are another potential deduction. These occur when the seller agrees to cover some of the buyer’s closing costs or repair expenses, negotiated as part of the purchase agreement. Such concessions can include appraisal fees, title insurance, loan origination fees, or repair costs identified during inspection. Limits on seller concessions vary by loan type; for conventional loans, they can range from 3% to 9% of the purchase price depending on the buyer’s down payment. Other agreed-upon seller expenses might include home warranty premiums or specific repair costs identified during inspections.

Receiving the Net Proceeds

After all deductions have been calculated and subtracted from the gross sale price, the remaining balance constitutes the “net proceeds.” The escrow agent or closing attorney is responsible for itemizing all credits and debits on a settlement statement, also known as a closing disclosure, which both parties review before the transaction is finalized.

The transfer of these net proceeds to the seller occurs shortly after the closing is complete. Common methods of transfer include a wire transfer directly to the seller’s designated bank account, processing within 24 to 48 hours. Alternatively, a physical check can be issued at closing, though this may require additional time for the check to clear once deposited.

Tax Implications of a Home Sale

Beyond the immediate financial transactions at closing, sellers must consider the tax implications of their home sale, particularly regarding capital gains. A capital gain arises when the sale price of the home, minus selling expenses and the adjusted cost basis, results in a profit. The cost basis includes the original purchase price of the home plus the cost of any capital improvements made over time. Maintaining thorough records of these improvements is important, as they can increase the cost basis and thus reduce the taxable gain.

For most homeowners, a tax benefit exists: the primary residence exclusion under Internal Revenue Code Section 121. This exclusion allows eligible individuals to exclude up to $250,000 of capital gains from their taxable income. For married couples filing jointly, this exclusion increases to $500,000. To qualify, sellers must meet both an ownership test and a use test, meaning they must have owned and used the home as their main residence for at least two of the five years leading up to the sale. The two years do not need to be consecutive.

If the capital gain exceeds these exclusion amounts, the excess profit may be subject to capital gains tax rates. Long-term capital gains, from assets held for more than one year, are taxed at preferential rates, which are lower than ordinary income tax rates. This exclusion applies only to gains from the sale of a primary residence and cannot be used for investment properties or vacation homes. This exclusion offers relief for many homeowners.