What is net proceeds? How to calculate
When listing a home on the market, the amount of money you will ultimately make from the sale is often a priority. The money a home seller keeps after all fees, commissions, closing costs, and other expenses have been paid is called net proceeds.
The exact amount of net proceeds a seller could earn is difficult to calculate until an offer has been accepted on the home. However, it is possible to get a general idea of what you are about to do.
What is the net real estate proceeds?
As the name suggests, net proceeds are the money a homeowner makes – or walks away with – after selling the property. The amount of proceeds a seller receives is usually less than the actual selling price of the home due to the expenses involved in selling a home, especially if there is still a mortgage to be paid.
“Net proceeds are the amount of money a home seller will receive after deducting all costs of a sale,” says Ralph Dibugnara, CEO of Home Qualified, a real estate resource and web series.
Costs associated with selling a home typically include agent’s commissions, title insurance, attorney’s fees, and escrow fees. Depending on where the property is located, there may also be property taxes and transfer duties to pay.
Another major factor that can eat away at net proceeds is the mortgage repayment balance. If money is still owed on the mortgage, that balance is usually paid with funds from the sale of the home.
How to calculate net proceeds from home sales
The easiest way to calculate net proceeds is to deduct all closing costs, expenses, and the balance of the seller’s mortgage from the final sale price of the home. Generally speaking, you can expect to pay between 7% and 10% of your home’s value in fees.
However, to get a more accurate idea of net proceeds, you can also consider some of the additional expenses associated with selling your home. This may mean including the cost of any repairs or improvements made to the home prior to listing, as well as the costs of staging your home. All of these costs eat away at the net proceeds from the sale of a home.
Example of net proceeds
Here is an example from Dibugnara of the net proceeds resulting from a house sale:
Let’s say a house is sold for $500,000. The seller’s costs to sell this home include a mortgage repayment balance of $300,000, realtor’s fees of $15,000, attorney’s fees of $1,000 and other sales taxes and close of $4,000. “That leaves the seller with net proceeds of $180,000,” he says.
Impact of net proceeds on your taxes
Depending on the type of property you sold and your plan for the money earned, your net proceeds may trigger a tax event, DiBugnara says. The impact on your taxes will depend on many factors, including your tax bracket, marital status, how long you’ve owned the home, and whether it was your primary residence.
When it comes to selling a principal residence, the IRS taxes “excessive profits”. Profit is different from net proceeds: it is the amount you earn from the sale beyond what you originally paid for the house when you bought it.
Current laws allow the first $250,000 of earnings for single filers, or the first $500,000 for married filers jointly, to be excluded from the impact on your tax debts. To benefit from this exclusion, the IRS states that you must have lived in the home as your primary residence for a period of time that equals two out of five years. Profits beyond this amount may be taxed as long-term capital gains.
You can, however, avoid being taxed if you use the proceeds from the sale to buy a new home. “If the profit from the sale of the house, i.e. the difference between what it cost you to buy it and what you sold it for, is reinvested in another house, then in most cases you can avoid capital gains tax,” says Dibugnara. “Keep in mind that this reinvestment must be completed within a certain time frame, typically 90 days to a maximum of six months.”
Is net proceeds influenced by how you sell your home?
The net proceeds from the sale of a home can vary greatly depending on how you choose to sell the property. Selling options include working with a traditional real estate agent or broker, selling on your own through a “for sale by owner” (FSBO) transaction, or selling to a company that buys homes for cash or for sale. an iBuyer.
“Net proceeds can be affected by how you sell your home, as selling costs can be different,” says Dibugnara. “For example, if you sell a house on your own, compared to using a real estate agent, it could cost you less in expenses, which would increase your bottom line.”
Selling a home by yourself (FSBO) eliminates the need to pay an agent’s commission. But remember, while this approach may eliminate that cost, it means you also have to take on all the work of showing and selling the home. Also, FSBO homes generally sell for a bit less. According to National Association of Realtors.
An iBuyer sale involves an online home buying company that makes an instant offer on your home, out of sight. This approach tends to result in less net proceeds for the seller, as iBuyers generally offer less than the market value of homes – and sometimes charge high fees.
“Because iBuyers must make a profit on the sale, they rarely bid at or above full market value, and their fee structure is often more expensive than an agent’s commission,” says Rick Sharga, Executive Vice President of Market Intelligence for Real Estate Data Platform ATTOM Data Solutions.
When you sell a home the traditional way, with an agent, you can expect to pay a commission. Real estate commissions are usually the largest expense associated with this approach and represent around 5-6% of the sale price. But selling with an agent is also the best of the three ways to get the best price for your home.