Selling your home can be an exciting journey, but understanding the true costs of selling your home is crucial. It’s not as simple as subtracting the sale price from what you originally paid. Expenses like real estate commissions, capital gains taxes, and even home improvements can significantly impact how much you actually walk away with. Let’s explore these key factors so you’re fully prepared for what to expect.
Key Takeaways
- Real estate agent commissions: As of August 2024, sellers are only responsible for their agent’s commission, but may still offer to pay the buyer’s agent.
- Capital gains tax exclusions: Single filers might be able to exclude up to $250,000, and married couples might exclude up to $500,000 on primary residences, depending on eligibility.
- Local transfer taxes: Sellers might face additional costs like local taxes, which vary by city and county.
- Home improvements and cost basis: Major home improvements can reduce your capital gains tax liability.
Real Estate Commissions
One of the first significant costs you’ll encounter when selling your home is the real estate agent’s commission. The landscape of real estate commissions has recently undergone a significant transformation. Historically, home sellers were responsible for covering both their own agent’s commission and the buyer’s agent’s commission, typically splitting a total of around 5-6% of the sale price. However, due to a major legal settlement involving the National Association of Realtors (NAR), sellers are no longer required to pay the buyer’s agent commission upfront, which has upended the traditional commission model.
Starting in August 2024, sellers only need to cover their agent’s commission. Buyer’s agents now require a signed agreement with their clients, who will be responsible for covering their own agent’s fees. These changes aim to increase transparency and allow more negotiation flexibility. For sellers, while the burden of paying the buyer’s agent is lifted, they may still opt to offer compensation to attract more buyer agents, which could now be negotiated privately.
This is a major shift from the previous norm and introduces new dynamics into real estate transactions, especially regarding how agents secure their commissions and how buyers and sellers approach their negotiations
Capital Gains Taxes
If your home has significantly increased in value since you purchased it, you might owe capital gains taxes on the profit. Capital gains are calculated by subtracting the cost basis of an asset, like your house, from its sale price. If the sale price is higher than the cost basis, you have a capital gain. If the sale price is lower, you have a capital loss.
Thankfully, the IRS allows for some exclusions—up to $250,000 for single filers (and $500,000 for married couples filing jointly)—as long as the home has been your primary residence for at least two of the last five years.
For more information about federal and state capital gains, see How to Calculate Capital Gains on a House Sale.
Net Investment Income Tax (NIIT)
In addition to federal capital gains taxes, you might also be subject to the Net Investment Income Tax (NIIT). The Net Investment Income Tax (NIIT) is a federal tax that applies to certain types of investment income for high-income earners. It was introduced in 2013 as part of the Affordable Care Act to help fund Medicare expansion and applies at a rate of 3.8%. This tax is imposed in addition to any regular income taxes you owe on your investment income.
Capital gains from the profits of selling real estate is considered investment income and can be subject to the NIIT. For more information about NIIT, who pays it, and what qualifies as investment income, see Net Investment Income Tax (NIIT): How to Plan and Minimize Costs.
Local Taxes
Depending on where you live, there may be additional local taxes you need to account for when selling your home. Many cities and counties impose a local transfer tax, which sellers are typically responsible for paying. This tax is levied on the sale of the property itself and can either be a percentage of the sale price or a fixed amount, depending on the jurisdiction. For instance, in some areas, the rate may be as low as 0.5%, while in others, it could climb to over 2%, significantly reducing your final proceeds.
Moreover, certain municipalities have passed additional taxes through voter-approved measures. These taxes are often implemented to fund important community initiatives such as improving public schools, building affordable housing, or enhancing local infrastructure. In high-demand housing markets, especially in major cities, these taxes are becoming more common as a way to address public needs without raising broader taxes. While these measures support essential community services, they add another layer of cost that sellers should plan for in advance. Always check with your local tax authorities to understand any specific obligations before selling your home.
Home Improvements and Your Tax Basis
Certain types of home improvements can be added to your cost basis, but not all home expenses qualify. For example, major improvements that add value to the home, prolong its useful life, or adapt it to new uses—such as adding a room, installing solar panels, or upgrading the HVAC system—can typically be included. Routine repairs or maintenance, like fixing a leaky faucet or painting, don’t increase your cost basis since they simply keep the home in good working condition rather than increasing its value.
By keeping detailed records of these improvements and understanding how they affect your cost basis, you can significantly reduce the capital gains tax you may owe when selling your home. This strategy not only saves money but also ensures that you’re fully taking advantage of the tax benefits that come with investing in your property.
Closing Costs
In addition to commissions and taxes, sellers also face closing costs, which are a collection of fees and expenses required to finalize the sale of the home. These costs typically range from 1% to 3% of the sale price and can cover a variety of services, including:
- Title Insurance: This protects the buyer and lender from any potential disputes or legal issues related to the property’s title. Sellers are often responsible for covering the buyer’s title insurance policy.
- Attorney Fees: In some states, an attorney must be involved in the real estate transaction, and their fees are often part of the closing costs.
- Escrow Fees: The escrow agent handles the transaction, including holding funds and ensuring that all conditions of the sale are met. Sellers typically share the cost of escrow services with the buyer.
- HOA Transfer Fees: If your home is in a community with a homeowners’ association (HOA), there may be a transfer fee for changing ownership, along with any outstanding dues that must be settled before the sale.
The Bottom Line
Selling a home isn’t just about securing a great sale price—it’s about having a clear understanding of all the costs and deductions that come with it. From real estate commissions and local transfer taxes to federal capital gains taxes and the Net Investment Income Tax (NIIT), these financial considerations can significantly impact your final proceeds. Preparing for these expenses will help you avoid surprises and ensure you’re making well-informed financial decisions throughout the process.
Additionally, if you’ve invested in any home improvements, be sure to factor those into your cost basis. Improvements like major renovations, energy-efficient upgrades, and other value-adding enhancements can not only increase your home’s appeal but also help reduce your capital gains tax liability. By accounting for every eligible deduction, you can minimize your tax burden and maximize your net profit, giving you more flexibility to plan for your next steps—whether that’s buying a new home, investing, or pursuing other financial goals.
For a clear example of how selling a house works, including costs like commissions, taxes, and capital gains, check out the detailed breakdown at How to Calculate Capital Gains on a House Sale. It’s a great way to see how these factors impact your final proceeds and help you plan smarter for your own sale.
In short, selling a home is more than just a transaction; it’s a financial strategy. The more informed you are about the potential costs and benefits, the better equipped you’ll be to make the most of your home sale.
And remember, it’s always a great idea to chat with your financial or tax advisor to make sure your decisions are right on track and aligned with the latest guidelines and laws.