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Buying a home is expensive, but sellers can also face several costs. Costs of selling a home can include commissions and fees such as filing fees or notary fees as well as potential taxes. The costs of preparing your home to show to buyers or hiring a lawyer are among the possible other expenses.
Learn more about what to expect with the costs of selling a home and ways to minimize what you have to pay, including which costs are negotiable.
Key Takeaways
Real Estate Agent Commissions
The largest cost involved in selling a home is often paying the real estate agents’ commissions. And it may come as a surprise to some first-time sellers that the seller is typically responsible for paying commissions for both their own agent and the buyer’s agent.
Traditionally, a 6% commission split between the seller’s and buyer’s agents has been the standard. But commissions are negotiable. According to RealTrends, which collects data on real estate transactions, the national average commission in 2020 was about 4.9%, down from 5.4% in 1990.
You can also save on commissions by selling your home without an agent. Again, you may still have to pay the buyer’s agent, and you will be taking on a great deal of work that your own agent would otherwise handle for you.
Preparing Your Home to Sell
Real estate agents often refer to a home’s curb appeal, which is the first impression the property makes on potential buyers. If you’re selling your home, you’ll want it to be in the best condition possible to attract more buyers and to help you get a higher price.
Potential costs with preparing your home to sell can include repainting, landscaping, or any home repairs. If a home inspector identifies problems with the property, you may have to pay to fix them or negotiate with the buyer.
Some sellers invest in staging their homes to increase their appeal. That entail decluttering or buying (or renting) new furniture. According to a 2021 National Association of Realtors (NAR) report, the services of a professional could run about $1,500, which in many cases, will more than pay for itself.
Note
In the NAR’s survey, 23% of selling agents said staging increased sales prices by 1% to 5%, while another 29% reported increases of 6% to more than 20%.
Incentives for Buyers
In a strong housing market, a home might receive multiple bids, and you may not have to offer additional incentives to compete for potential buyers.
In a weaker market, however, incentives can make a difference in selling your home. Common incentives include paying points toward the buyer’s mortgage (known as seller-paid points), covering some of the buyer’s closing costs, or giving the buyer some furniture or appliances.
Paying Off Your Mortgage
If you still owe money on your mortgage, you’ll have to use some of the sale’s proceeds to pay it off. For the deal to go through, you’ll need a payoff letter or statement from your lender. It will show how much you owe the lender, including any fees or prepayment penalties associated with the transaction.
If you have an escrow account with your lender, the lender should either apply that amount to your outstanding debt or refund it to you.
Hiring a Lawyer
Whether you’re required to use a lawyer in selling your home varies from state to state, but it’s often a good idea either way. The seller’s lawyer can draft the sales contract and represent the seller’s interests at the closing. What you’ll pay for hiring a lawyer can vary widely, but it’s likely to be from several hundred to several thousand dollars.
Other Closing Costs
Paying the real estate agents’ commissions will account for the bulk of the closing costs the seller is responsible for, but there can be others. For example, the seller may be expected to pay any transfer taxes, which some states impose when a property changes hands. If the property is part of a homeowners association, the association might charge a transfer fee, as well.
These rules also vary from state to state, and who pays a particular closing cost can often be negotiated between the buyer and the seller as part of the contract.
Income Taxes
If you make a profit from selling your home, you may be subject to federal income taxes. But you will be eligible to exclude a portion of your profit if you meet these two criteria: You owned the home for at least two years and you lived in it for at least two years out of the past five.
Assuming you qualify, you can exclude up to $250,000 of the profit as an individual or $500,000 as a married couple filing a joint tax return.
Your profit isn’t based on what you paid for the home initially but on your adjusted cost basis. That consists of what you paid for the home plus the cost of any improvements you’ve made over the years. So, for example, if you added a new roof, central air conditioning, or wall-to-wall carpeting, those expenses will increase your basis and lower your profit. You can add some of your closing costs from when you purchased the home to the basis as well.
Also, the length of time you owned your home will have an impact on the capital gains tax you’ll have to pay. If you owned the home for at least a year, your profit (if any) will be taxed as a long-term capital gain. If you owned it for less than a year, it will be taxed at the potentially much higher rate for short-term capital gains.
What Closing Costs Does a Homebuyer Have to Pay?
Homebuyers are responsible for several fees. Typical closing costs include a mortgage origination fee, property appraisal fee, title search fee, title insurance premium, and first-year homeowners insurance premium. Note that some of these fees may be negotiable and the seller may agree to chip in as part of your deal. In total, a buyer’s closing fees often range from about 3% to 6% of the home’s sale price.
Are Closing Costs Tax Deductible?
Most closing costs are not tax deductible. The exceptions are mortgage interest (including points) and real estate taxes, and that’s only if the buyer or seller itemizes deductions when they file their tax return for the year. However, sellers are allowed to add some of their original closing costs to the adjusted cost basis for their home, which can reduce their tax liability.
What Is a No-Closing-Cost Mortgage?
A no-closing-cost mortgage is one in which the lender will either add the borrower’s closing costs to the loan amount or charge a higher interest rate to make up for them. In other words, even if you don’t have to pay any closing costs initially, you’ll still pay them over time.
The Bottom Line
Selling a home can entail several expenses. The largest single expense is likely to be real estate agent commissions, but there are other costs and fees to keep in mind as well. If you sell your home for a significant profit, you may also owe income taxes on a portion of that amount.
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This article was originally published by a www.investopedia.com . Read the Original article here. .