In recent years, we’ve experienced a seller’s market – and many homeowners have been eager to take advantage of the situation.
During the pandemic years, plunging interest rates were counter-balanced by rising home sales. That balance is shifting. According to the U.S. Census Bureau and the Department of Housing and Urban Development (HUD), new home sales fell 16.6% from March 2022 to April 2022, a nearly 27% drop from a year ago. Interest rates on 30-year fixed-rate mortgages reached their highest since April 2020.
Nevertheless, despite rising interest rates and creeping inflation, the housing market continues to enjoy favorable pricing, largely due to low inventory. Reuters calculated that the median price of new homes increased 21.4% in March from the previous year – resulting in homeowners asking the question: Is this a good time to sell my home?
If a homeowner determines that this is the time to move, questions arise:
- How much will I make on my house?
- What is my home worth?
- What will my net profit be?
First, it’s important to know the current value of your home. A good place to start is by using an online home value estimator. HomeLight’s free home value estimator can give you a ballpark idea of your home’s worth.
Next, we did some research and spoke with Jesse Allen, a top agent who sells over 50% more quickly than the average Jeffersonville, Indiana, agent, in order to break down how to calculate how much money you might walk away with after selling your home.
How much profit will I make selling my house?
Answering this question requires more than subtracting your remaining mortgage loan balance from the sales price. Nevertheless, some homeowners experience unrealistic expectations because they confuse net proceeds with profit.
Let’s define the terms and explain the calculations.
Net proceeds represent the final amount of money a seller receives from selling a home after expenses such as commission, repairs, inspection costs, transfer fees, mortgage balance payoff, and other assorted fees are subtracted.
“Consider it one transaction,” Allen suggests. “It’s the house you’re selling, minus fees, taxes, commission, and paying off your loan.”
Profit adds one additional expense to the calculation: the initial purchase price of your home. In fact, it’s the original purchase price rather than the mortgage balance that determines your profit, because the mortgage balance doesn’t take into account any down payment or refinancing. Therefore, to determine profit, subtract the original purchase price plus all those costs and fees listed above from the final sale price.
Allen points out that you should also take into account any improvements you’ve made to the home, such as HVAC updates, a new roof, or landscaping installations. “All that comes off your net profit.”
Keep receipts, Allen continues. While he rightly advises sellers to consult their accountant, he points out that typically “you’re taxed on your net profit.” Thus, it’s important to know what gets subtracted in that equation.
How do I estimate net proceeds from my home sale?
Estimating the net proceeds from the sale of your house isn’t difficult. As mentioned above, it’s basically the amount of money left after deducting the costs of preparation and sale of your home from the sale price.
We’ll walk you through some typical costs so you’ll know what to expect. But first, check out these handy HomeLight tools to help you get started:
Home Value Estimator: An automated valuation model (AVM) tool that can provide an initial ballpark estimate of what your home might be worth. We’ll show you how to refine the automated estimate for the purpose of gaining a general idea of proceeds.
Net Proceeds Calculator: This free tool provides a rough estimate of the cost of selling your home and the net proceeds you could earn from the sale.
The basic equation that a net proceeds calculator uses is:
Your home’s sale price − any mortgage payoff amount − your costs = estimated net proceeds
Keep in mind that these tools are for educational purposes only and do not replace professional estimates.
What costs can I expect to pay on my home sale?
Now let’s take a closer look at the elements of the home sale net proceeds equation. Here are some typical costs, with a brief definition and anticipated cost.
- Home sale price: The price the buyer pays. After all the negotiating is finished, this is the amount written on the sales contract.
- Real estate agent commissions or fees: Averaging 5.8% of the sale price of the home, agent commissions include both the buyer’s and the seller’s agent.
- Mortgage payoff amount: The amount you must pay to satisfy the terms of your loan to completely pay off the debt. This will likely differ from your current balance.
- Home repair or improvement costs: The cost of any work done on your home in order to sell it. Allen explains that in Indiana, the seller is required to fix “major defects” such as the roof, foundation, and HVAC system. Other items, like appliances and paint, are up for interpretation, he says. “You’re at the mercy of the appraiser.”
- Staging costs: Staging and prep fees generally account for 1%-4% of the home’s sale price. This could include furniture rental for vacant homes or cleaning, painting, decluttering, and rearranging furniture in owner-occupied homes in order to present the space in the best light for buyers.
- Seller concessions: Incentives to encourage buyers to close the deal. These could include performing repairs or offering warranties or closing cost credits. They can amount to as much as 2%-6%.
- Homeownership overlap costs: Overlap costs can include mortgage payments on your unsold home, as well as the cost of utilities, pro-rated taxes, and insurance. They generally amount to 1%-2% of the sale price. For the buyer, it averages 2%-5% of the loan amount.
- Closing costs: Often amounting to 1%-3% of the sale price, closing costs include title fees, taxes, and escrow and are sometimes shared by the buyer and seller. They can become a negotiating point.
Here is a sample net sheet – a document that estimates how much profit you can expect after subtracting fees and expenses from the sale price of your home – based on a median home sale price of $375,000:
Home sale price: $375,000
Agent commissions: $20,625 (5.5%)
Mortgage payoff amount: $200,000
Money spent on repairs or improvements: $6,000
Money spent on home staging: $2,250 (0.6%)
Seller concessions: $1,875 (0.5%)
Homeownership and overlap costs: $3,750 (1%)
Closing costs: $11,250 (3%)
Total estimated costs to sell: $45,750
Total estimated proceeds: $129,250
Will I have to pay capital gains tax?
“Flippers pay capital gains,” Allen summarizes. “If you lived in the home awhile, you [probably] won’t owe capital gains.”
As a seller, you may also be liable for capital gains tax. This refers to the taxes you owe on profits achieved from the sale of an appreciating asset — your home.
The first $250,000 of profits resulting from the sale of a primary residence are typically not taxed under the capital gains tax exclusion if you file your taxes as single (or $500,000 for married couples filing jointly) — as long as you meet additional requirements. This is known as the Section 121 exclusion.
If you don’t qualify for capital gains tax exclusions, you must report your home to the IRS through a 1099-S form.
If you sell a second home, you may have to pay capital gains tax at a rate of up to 20%, depending on your tax bracket and other factors, including how long you’ve owned the home, cost of ownership, and any other fees you’ve incurred or capital improvements you’ve paid for. Second homes include vacation homes and rental homes, which are investment properties.
To help you navigate the complicated world of real estate taxes, consult a real estate accountant or your financial advisor. They can help mitigate your capital gains tax by advising you on how you can reduce it.
More expert tips and insights about home sale proceeds
Want to dig a little deeper? Here are some additional insights into home sale proceeds and profit.
How long do you need to be in a house to make money?
The old five-year rule doesn’t always apply these days. Today, appreciation is the key. Has your home increased in value enough for you to earn a profit on its sale? In 2022, the average appreciation rate is 14.5%, a significant increase since 2019, when it was 4%. Supply and demand greatly impact appreciation, but the home’s conditions and local comps will also impact its value.
According to Allen, due to inflation over the past three to five years, many homeowners move within 12 months of buying their home. “They still make money,” he says. It’s all about supply and demand.
What are the most common closing costs on a house?
You can almost certainly count on paying the real estate agent commission, which typically ranges from 5% to 6%, with 50% going to each agent. You’ll also be on the hook for the mortgage payoff amount on the house you just sold, assuming you had a mortgage on it. While some may not apply to each transaction and almost everything can be negotiated, other commons closings costs can include:
- Transfer taxes
- Recording fees
- Title insurance fees
- Unpaid homeowners association (HOA) dues
- Unpaid real estate taxes
- Seller concessions
- Attorney fees
- Outstanding liens or judgments
Bottom Line: How much can I sell my house for?
Allen believes the agent should manage the sellers’ expectations by educating them about the “how to” and “why” of calculating their estimated net proceeds. “On paper, it may not look like a lot of profit,” he says.
Determining how much you’ll make from selling your home is pretty straightforward. The only trick is remembering to include all the expenses.
You must subtract mortgage payoff, prep costs, agent commission, closing costs, and all other fees from the sale price to get your net proceeds. Then, you have to do the extra math of subtracting the home’s purchase price and any upgrades or improvements done to the home in order to get your true profit. The reason this is important is that you’re typically taxed on net profit.
If it still sounds complicated or you don’t know where to get all the figures, you can ask your real estate agent to walk you through it. Don’t have an agent? HomeLight’s free Agent Match platform analyzes over 27 million transactions and thousands of reviews to determine which agent is best for you based on your needs. In just a few minutes, you can be matched with a top agent experienced in your area.
Header Image Source: (Aaron Lefler / Unsplash)
Lori LovelyContributing Author
- Richard HaddadEditor