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| Transaction costs |
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| When lenders look at the revenue created by the sale of a property, they usually knock 10% off the top for transaction costs. So if you sold a $100,000 house, they would only count it as a $90,000 asset. $100,000 sale - $10,000 transaction cost = $90,000 cash This is to account for a range of fees including the standard 6% real estate sales agent fee. If you tell the lender that you sold it yourself, they'll deduct less. |
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| Outstanding balances |
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| Then you subtract the balance of any outstanding mortgages from the $90,000. Don't forget those pesky prepayment penalties if you bought the house recently. $90,000 cash - $90,000 mortgage = $0 asset If you're not sure, check your mortgage agreement to see if you opted for a prepayment penalty. If so, it is usually in effect for 3 years after the purchase. |
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| Capital gains tax |
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| In August, 1997, the federal government made major changes in the way in which the profits from the sale of homes are taxed. |
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| To determine the tax on the profit from the sale of a house sold after May 7th, 1997, you need to calculate the profit and know how much of the profit is tax exempt. |
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| A quick way to calculate the profit on the sale of a house is to take the selling price and subtract the adjusted basis, which is the sum of the purchase price, all the money that you spent on major improvements (like a new roof, not repairs and paint jobs) and the transaction costs. |
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| Tax exemptions |
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| Assuming that the house has been your primary residence for at least two of the last five years before you sell it and you're not selling a multi-million dollar mansion -- much, if not all, of the profit that you make is tax exempt. |
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| Single home owners get a $250,000 exemption, and married homeowners get a $500,000 exemption. Any profit made over this amount is taxed at the 20% rate. |
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| Old tax code |
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| Prior to August 1997, the capital gains tax on the sale of a primary residence was dramatically different. |
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| Assuming that you lived in a house for the last two years and you bought another house of equal or greater value within two years after selling the first one, the profit from the sale of the house was deferrable. |
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| But, if two years passed and you hadn't bought a house of equal or greater value, you would be subject to a 28% tax on the profit. |
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f you have sold (or plan to sell) your house, investment property or vacation home and plan to use the proceeds for a down payment, don't forget to subtract transaction costs and the amount that you still owe to lenders and the tax man.
