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How Much Money Will You Net?

When you sell your home, the biggest expense will probably be paying off your mortgage. The loan will usually be paid off from the funds you receive from the buyer at closing and forwarded directly to your bank. (In the event that you owe more on the home than your buyer will pay, it will result in what’s called a “short sale”. In this case, you will need professional advice from your lender - and an attorney.)

There are other expenses associated with the sale of a home and they are discussed in broad strokes below. Determining whether or not you will make a profit - or suffer a loss - is a matter of mathematics. Here’s an example of a home that sold for $300,000 and how to calculate the profit or loss after some typical debt and expenses. Your expenses may vary and you should get advice from a tax accountant. The figures below are entirely hypothetical.

Calculating Profit on a Sale

Seller’s Debt & Expenses:

 
Note: The IRS does not allow moving costs to be included when calculating expenses on the sale of real estate and is therefore, not currently deductible. On the other hand, , if you made $50,000 in improvements to the home while you owned it, you may be able to deduct that amount from the “profit” when it comes time to pay income taxes at the end of the calendar year in which you sold.

Second Mortgages, Liens and Other Clouds on the Title

As shown in the example above, aside from paying off your first mortgage, you may need to pay off a second mortgage. Perhaps - over the course of ownership - you borrowed an additional $25,000 from the bank (against the value of your home) to make a major improvement. This second mortgage (also known as a Home Equity Loan) must obviously also be paid off.

A home mortgage loan is a type of lien on your home. But, there are different types of liens that may be placed against your home. For example, the IRS can place a lien on your home for failure to pay past income taxes. A judge can place a lien on your home for failure to pay child support. Even a general contractor or a landscaper can place a lien on your home if you haven’t paid him for work. These liens will be uncovered when the buyer’s title search is performed and will be called clouds on the title. You must clear title of any clouds before you may sell the property.

Taxes on the Sale of Your Home

No matter what month in which you sell your home, you will pay taxes on that sale. How much you will pay depends on the sale price, if you made a profit, your personal income, your marital status and how long you lived in the home. This section is written in broad terms just to give you an idea of what to be concerned with. You should consult a qualified tax accountant to learn what your specific responsibilities are. The two most common types of taxes paid on the sale of real estate are capital gains tax and the realty transfer tax.

Capital Gains Tax

This is a tax you pay only when a profit is made on the sale of your home. A sale can bring profits in the hundreds of thousands of dollars so the IRS may be owed a substantial sum. The good news is that currently, there are limits to how much of your profit can be taxed. The capital gains laws are always subject to change. But as an example, in 2009 they were as follows:

Married People Who File Jointly:

This group could earn up to $500,000 in profit on the sale of a home and not pay a penny in capital gains taxes if they lived there for at least two consecutive years of the last five. But, if they made a profit of $600,000, they would pay capital gains taxes on $100,000.

Singles:

This group can earn up to $250,000 in profit on the sale of a home and not pay capital gains taxes if they have lived there for at least two consecutive years of the last five. But, if they made a profit of $300,000, they’d pay capital gains taxes on $50,000.

Realty Transfer Tax

The realty transfer tax is based on the sale price (the more you sell it for, the more you pay) and it is paid to the state of New Jersey. It is a rather complicated calculation. Make sure that you, or your representatives, have calculated properly. If you are a senior citizen, disabled or a veteran, you will likely be entitled to discounts.