The definition of net proceeds is straightforward – net proceeds is the amount of money you have left after you sell an asset and pay all of the accompanying expenses. The term applies to all types of transactions, from selling small products to selling a house.
Knowing how to calculate net proceeds when you are selling a house is paramount. It will determine how much money is left in your pocket after the sale and let you pick out the best deal. Plus, your net proceeds affect the capital gains tax you (potentially) have to pay. We’ll cover all of this in the article.
Net proceeds are calculated by deducting any expenses of the transaction from the gross proceeds of a sale. So, if you sell an asset for an X number of dollars – those are your gross proceeds.
You incur certain expenses – production and marketing costs and other miscellaneous expenses that add up to Y. Your net proceeds are your gross proceeds minus the expenses, so the net proceeds are X minus Y.
Then, what are net proceeds when selling a house? The same principle applies. First, you will need to calculate the gross proceeds – which is the price you sell the house for. For example, we’ll say that you sold your house for $250,000.
Now, you need to calculate the expenses. The average realtor commission in Southern California is around 5%, so in this case, that would be $12,500. The closing costs end up being $10,000 and you have a remaining mortgage of $27,500.
When you add it up, you have to pay $50,000 in expenses. You deduct the $50,000 from the gross proceeds, $250,000, and what you end up with are your net proceeds – which is $200,000 in this case. Once again, the formula is: gross proceeds - expenses = net proceeds.
How much you have to pay in capital gains tax has a significant impact on how much money will end up in your pocket. The topic of the capital gains tax you need to pay when selling a property is complex, so we won’t cover it in this article.
You can read more about how it functions, the potential exclusions from and deductions to the tax, and tactics on how to minimize them by reading this article. Here, we’ll only deal with the basics.
To get back to the topic, you have to pay the capital gains tax on your capital gains. Your capital gains are your net proceeds minus the cost basis of your property. Using the previous example, you sold your house for $250,000, the expenses are $50,000, so your net proceeds are $200,000.
In essence, the cost basis is how much you paid when you bought the house plus any major improvements you made. The exception is if you inherited the property – then, the cost basis is the fair market value of the home at the time of the previous owner’s death.
Let’s say that you paid $120,000 for the house and added improvements in the value of $10,000. Your cost basis is $130,000. When you deduct the cost basis ($130,000) from your net proceeds ($200,000) you get your capital gains = $70 000. This is the amount of money you have to pay the capital gains tax on.
In simple terms, because the net proceeds are your profits, before the capital gains tax is applied. When you are considering multiple offers for a house, you should make your choice based on the potential net proceeds, not on the total price offered.
If you get two offers – one of $250,000, but you have to pay the realtor commission and closing costs and another one of $230,000, but without any commission or closing cost, in almost all cases, you’ll make more money by accepting the second offer. This is why you should always calculate your net proceeds before you conclude a sale.
A simple way to maximize your net proceeds is to cut down on your expenses. SleeveUp Homes buys and restores houses, eliminating the middlemen, so you don’t have to pay any realtor commissions. Request an offer and see what your net proceeds would be if you were to compare it with the traditional sales route.
SleeveUp Homes has been in the real estate business for years, and we can give you a cash offer that maximizes your net proceeds. We’re not realtors or wholesalers, we buy direct from you and give you the fairest possible price for your property. If you don’t want to go through the process of selling your home on your own, or you need to avoid foreclosure, SleeveUp Homes can help. We buy and rehab homes directly from homeowners, and we perform any repairs required to get a home into sale condition. We cut out the realtors and wholesalers so that we can pay top dollar for your house regardless of its condition.
If you’re ready to sell your home for a fair price without the hassle, contact us today to get an offer.
If you want to sell fast and are worried about how long the traditional process takes, and the commission and fees involved, consider working with SleeveUp Homes.