Over the past few years, home equity has hit record highs. Thanks to rising home prices, the average homeowner has almost $200,000 in tappable equity, according to a report from Black Knight Inc. Homeowners are in a great position to sell, but that doesn’t mean you get to keep everything from the sale of your home.
Paying off your existing mortgage is typically one of the biggest costs associated with selling your home, but there are others to consider, including closing costs, real estate agent commissions, taxes and other fees.
Here’s what happens to the money you make after you sell your home.
— How to calculate your profit from a home sale.
— If you have a mortgage.
— If your mortgage is paid off.
— Closing costs and fees.
— Real estate agent commission.
— Tax implications.
— Buying your next home.
[SEE: 15 Secrets to Selling Your Home Faster.]
How To Calculate Your Profit From a Home Sale
Calculating the profit from your home sale isn’t as simple as subtracting the remaining mortgage balance from the sale price. There are other costs incurred during the sale that you’ll need to subtract in order to calculate your net proceeds.
Grant Cardone, founder and CEO at Cardone Capital, a real estate investment firm, gave an example to explain what happens when you sell your home. “Let’s say you just sold your house for $1 million, had a $300,000 mortgage and you paid $500,000 for your home,” he says. When you close, this is what happens, according to Cardone:
— $300,000 goes to mortgage.
— $60,000 estimated real estate commissions.
— $10,000 other closing costs.
— $630,000 net balance.
— $500,000 cost basis.
— $130,000 gain.
— No taxes due.
“In this example, a single person would not have any federal taxes due because they are able to make up to $250,000 or $500,000 per couple as profit on a house without paying a federal tax,” Cardone explains. “There could be other things that are withheld at closing that might be due concerning legal documents, escrow or title costs.”
But suppose your gain is over $500,000. In that case, Cardone recommends itemizing all money invested in the house along the way, including repairs, landscaping, plumbing, upgrades, rehab, windows, maintenance and more, to reduce your taxable gain as much as possible.
If You Have a Mortgage
If you sell your home, your first financial obligation is to pay off your existing mortgage. “This process is handled by an escrow company or attorney, who will use the sale proceeds to pay off the mortgage lender, clearing the title for the new owner,” says Chris Hock, general contractor and president of Earth Savings Solutions in Denver. “They will provide a payoff statement detailing the amount paid to the lender.”
If what you receive from the sale of your home isn’t enough to cover the outstanding mortgage balance and other costs, then you’ll need to cover the difference or work out an arrangement with the lender. Some lenders also charge a prepayment penalty, which is a fee for paying off your mortgage early.
[Read: How to Pay Off Your Mortgage Faster]
If Your Mortgage Is Paid Off
If you don’t have a mortgage, then that’s more money that you get to keep in your pocket. You’ll receive the cash from the sale of the house, minus selling costs. These are typically closing costs, real estate agent commission and outstanding bills related to the property and taxes.
Closing Costs and Fees
“Closing costs are a collection of fees for selling a property,” Hock says. “These include title insurance, escrow fees, transfer taxes, notary fees and any outstanding property taxes or HOA dues.” Sellers typically pay between 6% and 10% of the sale price of the home in closing costs, but it’s possible to pay less by negotiating with the buyer. For example, if your home sold for $500,000, then your closing costs could be anywhere between $30,000 and $50,000.
Hock also noted that sellers might also have to cover costs related to necessary repairs or improvements following the buyer’s home inspection. Sellers aren’t required to make repairs and can refuse to pay; however, the buyer could choose to walk away from the sale if their initial offer was contingent on the inspection.
Real Estate Agent Commission
Sellers are usually responsible for paying the real estate commission of both the listing agent and the buyer’s agent. The commission is a percentage of the home’s sales price, typically between 5% and 6%, and any details regarding agents’ fees should be in the agreement you signed when you hired your real estate agent.
“While this may seem like a significant expense, a skilled real estate agent can be invaluable in guiding you through the selling process, pricing your home correctly and negotiating the best deal for you,” Hock explains.
[READ: Behind the Scenes: The Unglamorous Side of Being a Real Estate Agent]
Tax Implications
In addition to transfer taxes and property taxes, sellers may have to pay a capital gains tax on profit made from the sale of the home. However, there are exceptions, and most seller’s profits fall under the threshold for primary homes.
“In the United States, the IRS allows a substantial capital gains exclusion on the sale of your primary residence — up to $250,000 for individuals and $500,000 for married couples filing jointly, provided you’ve lived in the home for at least two of the last five years,” Hock says. But if your profit exceeds this limit or you don’t meet IRS residency requirements, you may be subject to capital gains tax.
Short-term capital gains, which are gains on the sale of property held one year or less, are taxed as ordinary income and could be as high as 37%. Long-term capital gains are taxed much more favorably, with rates of 0%, 15% and 20%, depending on taxable income.
If you owe taxes, you could reduce your profits by adding certain home improvements to the original purchase price, known as basis. According to the IRS, some improvements that increase basis include landscaping, a new roof, new home systems and more. Costs associated with ongoing repairs and maintenance necessary to keep your home in good condition are not included in your basis.
Buying Your Next Home
Part of your proceeds will also go into moving to your new home. Whether buying or renting, you’ll need to pay moving and storage expenses. According to Moving.com, the average cost to hire movers for a local move is $1,250, and a long-distance move of about 1,000 miles will cost around $4,890. You can save on moving costs by doing it yourself. Renting a U-Haul truck starts at $19.95 for a local, one-way move.
If you’re downsizing and purchasing a smaller home, it’s possible that your total gain could cover the cost of purchasing your new home. If not, then you’ll need to take out another home loan.
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What Happens to the Money You Make When You Sell Your House? originally appeared on usnews.com
