What is net income? How to calculate

When you’re listing a home on the market, the amount of money you’ll be paying out of pocket for the sale is often top of mind. The money a home seller keeps after all fees, commissions, closing costs and other expenses are paid is called net proceeds.

The exact amount of net income a seller will receive is difficult to calculate until they receive the home. However, it is possible to get a general idea of ​​what to do.

What is net income in real estate?

As the name suggests, net income is a homeowner’s net cash – or cash flow – after the sale of the property. The amount of proceeds a seller receives is often less than the actual sale price of the home because of the costs involved in selling the home, especially if there is still a mortgage to pay.

“Net income is the amount of money a home seller receives after deducting all selling expenses,” says Ralph DiBugnara, CEO of Home Expert, a real estate resource and web series.

Costs associated with selling a home typically include agent commissions, title insurance, attorney fees, and escrow fees. Depending on where the property is located, there may be property taxes and transfer taxes.

Another big factor that eats into net income is the amount of payments on the property. If money is still owed on the mortgage, that balance is generally paid off with the proceeds from the sale of the home.

How to calculate net income from the sale of a home

The easiest way to calculate net proceeds is to subtract the seller’s closing costs, expenses, and mortgage balance from the home’s final sale price. Generally, you can expect to pay between 7 percent and 10 percent of your home’s value.

To get an accurate understanding of net income, however, you may want to consider some of the additional costs associated with selling your home. This includes the costs of any repairs or improvements made to the home prior to listing, as well as the costs of preparing your home. All of these fees eat into the net proceeds from the sale of the home.

Example of net income

Here’s an example of the net proceeds from the sale of a home from Debugnara:

Let’s say a house sells for $500,000. The seller’s costs to sell that home include $300,000 in mortgage payments, $15,000 in real estate agent fees, $1,000 in attorney fees and other sales taxes, and $4,000 in closing costs. “That leaves the seller with a net income of $180,000,” he says.

How net income affects your taxes.

Depending on the type of property you sold and what your plan is for the proceeds, your net proceeds may create a tax event, Dibugnara says. The impact on your taxes depends on many factors, including your tax bracket, marital status, how long you’ve owned the home, and whether it’s your primary residence.

When it comes to selling a primary residence, the IRS imposes an “Excess Gains” tax. Profit is different from net income: it’s the money you get from the sale plus what you originally paid for the house when you bought it.

Current rules allow the first $250,000 of profits for single filers or the first $500,000 for married filers to not affect your tax liabilities. To qualify for this exclusion, the IRS stipulates that you must have lived in your residence as your primary residence for two out of five years. Any gain over and above that can be taxed as long term capital gains.

However, if you use the proceeds from the sale to buy a new home, you can avoid tax. “If the profit from the sale of the home, meaning the difference between what you paid to buy it and what it sold for, is invested in another home, you can avoid capital gains tax in most cases,” says Dibugnara. “Keep in mind that this reinvestment must be completed within a certain period of time, 90 days to six months at most.”

Is net income affected by how you sell your home?

The net proceeds from a home sale can vary greatly depending on the way you choose to sell the property. Selling options include working with a traditional real estate agent or broker, selling on your own, doing a “For Sale By Owner” (FSBO) transaction, or selling homes for cash or to an iBuyer buying company.

“Net income can affect how you sell your home because selling costs can vary,” Dibugnara says. “For example, if you sell your home yourself, compared to using a real estate agent, your expenses may be lower, which will increase your net income.”

Selling a home by yourself (FSBO) eliminates the need to pay an agent’s commission. But remember, while this approach can eliminate that expense, it means you have to do all the work of showing and selling the home. Additionally, FSBO homes typically sell for less. Between July 2020 and June 2021, the average FSBO listing sold for $260,000 compared to $318,000 listed with an agent, according to the National Association of Realtors.

An iBuyer sale includes an online mortgage company with real-time offers, an invisible view on your home. This approach results in less revenue for the seller, as iBuyers typically offer homes below market value — and sometimes charge higher fees.

“Because iBuyers need to make a profit on the sale, they rarely offer more than or near full market value, and their fee structure is often more expensive than an agent’s commission,” said Rick Sharga, CEO of Rick Sharga Market Intelligence. Property information platform ATTOM Data Solutions.

When selling a home traditionally, with an agent, you can expect to pay a commission. Real estate commissions are the largest expense associated with this approach and run about 5 to 6 percent of the sales price. But selling with an agent is the best of the three ways to get top dollar for your home.

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