When You Sell Your Home Do You Get the Equity?

When selling a home, understanding how your built-up financial stake, known as home equity, translates into cash is important. While equity represents the portion of your home you own outright, the actual funds received are influenced by various factors beyond the home’s value.

Understanding Home Equity

Home equity is the difference between your home’s current market value and the total amount you still owe on any loans secured by the property, such as your mortgage. It essentially represents the portion of your home’s value that belongs to you, free and clear of debt. For instance, if your home is valued at $400,000 and you owe $150,000 on your mortgage, your equity is $250,000.

Equity accumulates in two primary ways. First, as you make monthly mortgage payments, a portion of each payment goes towards reducing the principal balance of your loan, directly increasing your ownership stake. Second, your equity grows as the market value of your home increases, often due to general real estate appreciation or improvements you make to the property. This equity is not readily accessible cash until you sell, refinance, or borrow against it.

Calculating Your Gross Equity

Calculating your gross equity involves a straightforward calculation. Subtract the total outstanding balances of all loans secured by the property, including your primary mortgage and any home equity loans or lines of credit, from your home’s current estimated market value. This result is your gross equity, representing potential funds before selling expenses.

For example, if your home is appraised at $350,000 and you have a remaining mortgage balance of $150,000, your gross equity is $200,000. This figure provides a baseline understanding of your financial interest in the property, but it does not represent the actual cash you will receive at closing, as various costs will reduce this amount.

Deductions and Costs from Gross Equity

Numerous costs and deductions reduce your gross equity. Real estate commissions are typically the largest expense for sellers, generally ranging from 5% to 6% of the home’s sale price. This percentage is usually split between the listing and buyer’s agents, is often negotiable, and is paid from sale proceeds at closing.

Sellers are also responsible for various closing costs, which, when combined with commissions, can collectively range from 6% to 10% of the sale price. These expenses include:
Title insurance for the buyer (around 0.5% of sale price).
Escrow or settlement fees, which might include a flat fee between $500 and $2,000 or a percentage.
Recording fees.
Attorney fees.
Transfer taxes imposed by state or local governments.

The outstanding balance of your mortgage loan is paid directly from the sale proceeds at closing. Any other property liens, such as a home equity line of credit or judgments, must also be settled. Additionally, repair credits or concessions agreed upon with the buyer, and prorated property taxes and homeowners association dues, are deducted from your funds.

Receiving Your Net Proceeds

After all deductions and costs are accounted for, the remaining amount represents your net proceeds from the home sale. A closing or escrow agent manages the financial transaction, acting as a neutral third party to ensure all sale contract conditions are met before funds are disbursed.

At the closing, all parties sign the necessary documents. The buyer’s funds are disbursed, and the agent ensures your outstanding mortgage and any other liens are paid off. The net proceeds are then transferred to you, typically via wire transfer directly to your bank account or by a cashier’s check.

Sellers often receive their funds on the same day as closing, especially with a wire transfer. In some cases, funds may become available within one to two business days.

Tax Implications of Selling Your Home

The profit from selling your home, known as capital gain, can have tax implications. This gain is calculated as the difference between the sale price (minus selling expenses) and your adjusted cost basis. Many homeowners can exclude a significant portion of this gain from taxable income.

The Internal Revenue Service (IRS) offers a primary residence exclusion under Section 121. Single filers can exclude up to $250,000 of capital gains, and 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 during the five-year period ending on the sale date.

This exclusion applies only to your main home, not investment properties or second homes. If your gain exceeds the exclusion limits, the excess may be subject to capital gains tax. For detailed guidance, IRS Publication 523, “Selling Your Home,” is a resource. If your entire gain is excluded, you typically do not need to report the sale on your tax return.