Understanding Real Estate Terms: Calculating Net Proceeds and Profits

Are you thinking of selling your house but are having trouble understanding how much you’ll make from the sale? That’s not that surprising, as real estate vocabulary can make it difficult to understand even the simplest terms, let alone how to calculate the profit on a home sale.

And that’s what this article is meant to address – we’ll explain the terms that are used in a real estate transaction and teach you how to calculate your net proceeds and ultimate profits from a sale. We’ll also explain all the expenses you’ll have when selling your house, including the taxes.

By the end of the article, you’ll know exactly how much money you can make if you decide to sell your property. So let’s get to it.

Differentiating Between Important Terms 

Before we get to how you can calculate the amount of money you’ll earn when selling your house, we should define a few terms first, so that there is no confusion down the line.

Gross Proceeds

Gross proceeds are the amount of money you get when selling an asset before sale expenses. In this case, the sale price of your property. Just to be clear, gross proceeds are not the listing price of your home, but the actual amount that the home sold for. Thus, when you are selling a house, gross proceeds are synonymous with the sale price of your home.

Net Proceeds

Net proceeds are the amount of money you get after all the expenses of a home sale are paid, excluding potential taxes. So, net proceeds are the funds you are left with after you sold your home. The simplest formula to calculate net proceeds is:

gross proceeds - sale expenses = net proceeds

However, calculating your expenses in advance is the complicated part because there are many situation-dependent fees you may or may not need to pay. Here are the most common fees associated with a home sale:

• Realtor commission – the typical realtor commission is between 4 – 6% of the sale price. This includes the commission for the buyer’s and seller’s agents. As the seller, you will be expected to pay both commissions, unless you can negotiate a different arrangement.
• Staging costs – staging costs could include painting and cleaning and other activities that are necessary to present your home for sale. You may also need to pay for furniture rental if your house is empty and vacant. You can also hire a professional home stager or do it yourself. Consequently, it is hard to give an estimate for staging costs due to all the moving parts, but they are typically in the $1000 - $2000 range.
• Essential repairs – in some states, you may be required to fix major defects before you can sell your property, based on what the home inspector instructs. These repairs can include fixing the HVAC system, foundation, and roof. The cost will depend on the state of your home.
• Closing costs – these are the fees associated with a home sale that also include the preparation and issuing of documents, like title search and insurance fees, settlement, escrow, recording, and HOA fees, and the transfer tax. Closing costs are usually about 1% of the sale price.
• Mortgage settlement – if you have an outstanding mortgage balance, you will need to cover it from the proceeds of the sale. To pay it, you may need to pay the amount owed to your lender plus a prepayment penalty and a loan payoff fee, if that was stipulated in your mortgage contract.

 Profits

The profits from a home sale is the money you receive when you subtract the original purchase price of your home and the price of any major improvement you’ve made over the years from your net proceeds. Thus, the formula for profits is:

net proceeds - (original purchase price + cost of major improvements) = profits

This distinction is important because you get taxed (if it’s applicable in your case, but we’ll discuss that later) based on your profits, not your net proceeds. However, there is a caveat here – you may need to prove that you’ve made improvements and paid the fees associated with selling a home, so it’s best if you’ve kept your receipts.

Calculating Net Proceeds

Let’s give an example of an average home sale and calculate the net proceeds:

• You sold your home for $500,000
• The realtor commission was 5% ($25,000)
• You did not need to make any immediate repairs
• You paid off your entire mortgage before the sale
• You paid $1,500 for staging costs
• You paid 1% in closing costs ($5,000)
• Thus, your net proceeds are $500,000 - ($25,000 + $1,500 + $5,000) = $468,500

As you can see, you’re losing a significant amount of money in home-selling expenses, with the largest one being the realtor commission.

What Are Your Profits Then?

Continuing with the previous example, let’s calculate your profits.

• Your net proceeds are $468,500
• You originally paid $300,000 for the property
• You invested $30,000 in improvements over the years
• Your profits are $468,500 - ($300,000 + $30,000) = $138,500

This is the amount of money you are eligible to pay the capital gains tax for.

So What About the Capital Gains Tax? 

The capital gains tax is the tax you pay on the profits you made from selling your home. It is a complex topic that deserves an article of its own, which you can read more about here. In this article, we will only give a short rundown and mention the key points.

The amount you pay in capital gains tax is based on two factors:

1. whether the profits are considered short-term gains or long-term gains;
2. whether you are selling your primary or secondary residence.

Short-term gains are the profits you make when you sell a house that you’ve owned for less than a year. Long-term gains are the profits you make when you sell a house that you’ve owned for more than a year.

Depending on the profits from the sale, long-term gains can be taxed at 0%, 15%, or 20%. Short-term gains are taxed as regular income, so they are based on your tax bracket, which can be between 10% and 37%. We should note that capital gains are added to your yearly income, so they might bump you up to a higher tax bracket.

Then, according to IRS rules, your primary residence is the property you’ve 1. owned for two out of the last five years and 2. lived in as your main home for two of the last five years. It’s important to note that you can only have one primary residence, even if two properties would qualify.

The difference between selling your primary vs. secondary residence is that you get a tax exemption when you are selling your primary residence. You can exclude $250,000 of profits from taxes if you are single and $500,000 if you are married and file with jointly your spouse.

Let’s go back to our previous example where the profits from selling your home were $138,500. If this was your primary residence, you wouldn’t pay a cent in taxes. If it were your secondary residence, the amount you paid would be based on whether the profits are short-term or long-term gains.

How Long Do You Need to Wait to Sell a House without Losing Money?

By now, you understand the expenses of selling your house and can calculate house sale profits for your specific situation. But is there a general rule for when you should start thinking of selling your property to make a good profit?

For the longest time, the rule of thumb in real estate was the 5-year rule. This meant that a homeowner should live in a house for at least 5 years before selling it in order not to lose money on the investment. However, this rule isn’t really applicable in the current real estate market.

It was based on making the home your primary residence in order to minimize the capital gains tax (which still applies, but you don’t need to wait 5 years, as we’ve explained above) and waiting for the house to appreciate so you make a profit.

According to CoreLogic, the average appreciation rate of property in the US in 2022 is 14.5%. This is significantly higher than in previous decades, when it rarely reached 5% annually. Thus, the 5-year rule no longer applies, as realtors calculated house appreciation and profits based on circumstances that no longer exist.

However, there is still one rule you should try to follow - don’t sell your house within a year of owning it. You may not lose money on the sale, but you will be liable to pay the capital gains tax that is calculated the same as regular income tax. This will significantly eat into your profits from the sale.

How Can You Make the Most Money When Selling Your House?

It’s relatively simple in theory: 

1. Avoid the capital gains tax; 
2. Avoid paying realtor commissions; 
3. Avoid closing costs and repairs. 

It’s not that difficult in practice, either. SleeveUp Homes will buy your house for top dollar, cover the closing costs, and make any repairs necessary in-house. Plus, we don’t work with realtors, so you won’t be paying any commission.

So, we’ve got 2 and 3 covered. All you have to do is take care of no. 1. But don’t rush to make a decision – request a no-obligation cash offer, see what your gross proceeds are, calculate your net proceeds and profits, and see how much you’ll save by choosing to sell your house to us.

Author:

Zachariah Peterson , CMO /

Zach has broad experience in marketing, technology, and finance, and he has held leadership positions at multiple startups since 2017.

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