Earning

You could earn $70,000 on average when you sell your home: Don't make these common mistakes

Taking your time "really matters when it comes to money."

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The average profit on a home sale in the U.S. reached $68,843 in 2020, according to the most recent data from property tracker ATTOM Solutions.

Homes have gotten even more expensive since then: The median sale price was $385,650 in July, according to Redfin. So sellers could end up with an even bigger windfall. But it isn't wise to rush to spend that cash as soon as you've closed the deal.

If you see a huge bank deposit after selling, "prioritize, give yourself time, and don't make any rash decisions," says Janet Stanzak, a certified financial planner and founder of Financial Empowerment. "Time provides perspective, and that matters when it comes to money."

Don't forget home sale fees can eat into your profit

All the funds from a home sale won't go directly to you. Any fees you owe the real estate agent are usually due at closing. As the seller, you may also be able to pay other closing costs out of your profit from the home. Those fees can be equivalent to 2 to 5% of the home's value.

Once you have closed on the deal, you are likely to see the rest of the profit in your accounts soon after. Typically, transactions are completed through a bank wire and are coordinated by a title agency that facilitates the transfer of funds between the buyer and seller, explains Jorge Padilla, a certified financial planner and senior client advisor at The Lubitz Financial Group in Miami.

"It is common to receive all the sale proceeds within one to two business days from the actual closing date," he says. "The majority of the time, a bank wire transfer is done given the large amounts of funds transferred and the time-sensitive nature of the transaction."

And don't forget Uncle Sam: 'See if any taxes are owed'

Now it's time to factor in taxes. When you sell an investment like a house for profit, you may earn capital gains and likely will have to report that income on your taxes

"Don't go out and buy a Lamborghini," says Julian B. Morris, a certified financial planner at Concierge Wealth Management. "Check with your tax advisor to see if any taxes are owed."

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The federal government and most states charge taxes on this sort of income. The rate you pay depends on how long you've owned the home, how much you paid, and the property's value now. Your expenses as a seller, such as appraisal, attorney, or escrow fees, can reduce your taxable gains.

Depending on whether you qualify for short- or long-term capital gains tax, you can exclude up to $250,000 from the sale, or $500,000 for married couples, if you meet certain prerequisites. So if you're a single person who bought a home in 2018 for $255,000 and sold it today for $600,000 in a high-cost city, you would have made $345,000, of which as much as $95,000 could be taxable.

How to use home sale profits to buy another home

Millions of Americans moved last year, and many went from owning one home to the next.

"Most people, when they sell a primary residence, take the funds and reinvest it into their next house," Missouri realtor Chris Carter told the property website HomeLight. If that's your plan, it makes sense to set aside enough cash out of your home sale profit for a big enough down payment on the new place.

While you don't need to go the full traditional 20% down payment, a high deposit could help you land a great mortgage rate and avoid mortgage insurance.

Prioritize, give yourself time, and don't make any rash decisions.
Janet Stanzak
CFP

On the other hand, a June poll of 2,800 homeowners from Rent.com found that even after a home sale, 45% of people don't plan to buy another house right away. If you do plan to buy again later and meanwhile rent or find temporary housing with loved ones, you could use the interim period to bolster your finances.

If they want to use home sale profits to buy a new place within the next three to five years, Stanzak says to keep the money in a high-interest earning account. "Timeframe matters," she says. "An online money market might be the best option to keep the proceeds accessible and safe, earning something." 

How to use home sale profits to pay off debt or save

Sellers who don't plan to buy another house could put their profit to use tackling debt or saving for another financial goal. Americans struggling with student debt and credit payments, or those who have been hit particularly hard financially because of the Covid crisis, could use money from a home sale.

"Pay down the highest interest and or monthly payments first," suggests Morris. Then "work with your financial professional to find the optimal balance for your unique, spending, saving, and debt repayment strategy. Everyone has different financial circumstances."

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Set up an emergency fund if you don't have one and store cash there for rainy days and emergencies. You could also dedicate a chunk of the funds toward your 401(k) or another retirement account.

It depends on your goals, but it is possible to juggle saving, investing, and paying down debt at the same time, Stanzak says. "Focusing on one and not the other can result in less compounding from investing and continuation of paying high-interest costs. Doing these in tandem is important."

"Even though you may choose not to repurchase [a home] in the near term," she adds, "staying on top of your financial goals taking care of your money will keep that option open in the future."

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