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The Biggest Financial Questions Sellers Have

Jay Marks

Jay has been selling real estate since 1993 and has had the opportunity to help several thousand clients buy and sell real estate over those 30 years ...

Jay has been selling real estate since 1993 and has had the opportunity to help several thousand clients buy and sell real estate over those 30 years ...

Nov 7 8 minutes read

Don’t get caught off-guard about common real estate expenses and financial terms.

When you’re thinking about the financial aspects of selling your home, it’s easy to only focus on how much you can potentially get for your home (and how to maximize potential profit). 

However, offers and sales prices are just part of the financial picture. Real estate commissions and common expenses should be part of your “home math.” Additionally, there are a few financial terms that will pop up during the process that are worth understanding so you can make the best decision for your situation. 

To help get you up to speed on what you can expect, here are answers to the questions sellers ask most:

How do real estate commissions work?

A great real estate agent makes the process of selling a home much less stressful. They maximize your property’s worth, handle the extensive paperwork involved in a transaction, negotiate on your behalf and act as your advocate. The commission isn’t just payment for these services, it covers the expenses and fees incurred to market your home too.

The exact commission is set when you hire your real estate agent. This will usually be a percentage of your home’s sales price, but sometimes it can be a flat fee. Once your home sells, the commission is paid to your real estate agent. 

Then, behind the scenes, it’s split in a few big ways:

Buyer’s Agent: Most buyers do not currently pay their agents directly. Instead, they are paid by sharing the commission of the seller’s agent. Like broker fees, the split can vary. 

Next, your real estate agent will pay the expenses involved in helping your house to sell. These are:

Photography: Great real estate agents hire a photographer they trust to show your home in the best light possible. 

Video Tours: While video used to be considered a nice bonus to complement an online listing, they have become necessary with so many buyers purchasing property in other states.

Online Marketing: A great agent isn't going to just upload your home’s photos to the MLS and call it a day. Instead, they'll develop a strategy to give your home an impressive digital presence, including a dedicated page on their website, social media strategy, and content marketing (newsletters, online advertising, and other promotional efforts). 

“In Real Life” Marketing: From brochures to flyers, open houses to outreach efforts, this is everything involved in attracting potential buyers to your home. 

Business Expenses: Think office supplies, gas money, and other costs related to their work.

Referral Fees: Some agents offer payment to the person who brings a new client their way.

How does selling my home impact my taxes?

When you sell your home, the amount of money left after paying qualifying expenses and any remaining mortgage debt is potentially taxable as capital gains. The good news is that not all profit is subject to capital gains tax. In general, the first $250,000 of profit can be excluded if you are single and $500,000 if you’re married filing jointly.

In order to qualify for this exclusion, certain conditions have to be met. The home has to be your principal residence (not an investment property) and you have to have lived in it for two of the five years leading up to the sale. 

If you’re in a position where your profit exceeds the exclusion amount, you will have to pay tax on the overage. 

Also, any property taxes you’ve paid on your home can still be deducted, as long as it doesn’t exceed the $10,000 maximum amount for state and local taxes.

What expenses are tax-deductible when selling my home?

It’s important to note that expenses related to your home aren’t treated like the typical deductions on your income taxes. Instead, the benefit is a reduction in your capital gains tax. Anything you’re claiming as an expense gets subtracted from the sales price of your home.

In order for expenses to qualify, they have to tie directly to the sale of the home and aren’t something that affects the physical property itself. Things like advertising, appraisal fees, attorney fees, title search fees, and real estate broker’s commission qualify as expenses. Hiring painters or landscapers would not qualify. 

However, some home improvements can give you a potential tax benefit. If you made a big improvement in your home (such as a kitchen renovation), you can add the cost to your home’s tax basis. For example, if you had purchased your home for $300,000, then made a $10,000 improvement, your basis would be $310,000. You would then subtract this amount from the sales price to determine the capital gain.

What is option money vs. earnest money?

Once buyers come into the picture, you may hear the phrases "option money” and “earnest money” come up. Both are separate from the offer amount and are negotiable.

Option money is a fee paid to the seller during the option period, a set time specified in the contract. This period allows potential buyers to take a closer look at your property (inspections and appraisals). The fee essentially compensates you for not leaving the listing open to other offers.

At any point prior to the end of the option period, the buyer can terminate the contract for any reason. If the buyer proceeds with the contract, the option money is usually credited at closing. 

Earnest money is different. This is an amount the buyer includes in their offer upfront to show they’re seriously interested in your home. Earnest money is negotiable, but typically 1-3% of the purchase price. If you accept the buyer’s offer, the earnest money is held in an escrow account until the sale is finalized per the language in the purchase contract. Earnest money makes it harder for the buyer to back out, offering some protection for sellers worried about the idea of having to potentially re-list their property.

If everything goes smoothly, the earnest money goes back to the buyer at closing, usually credited to the down payment or the closing costs of the buyer. 

Why is the assessed value different from the market value?

Let's start by defining both numbers: the market value of your home is typically the price that your real estate agent proposes you list your home for. The assessed value of your home is used for tax purposes and typically depends on local municipalities.

It's not unusual for the assessed value to be lower than the market value. It is typically based on several factors, including improvements made to the home, any income being made from the home, etc. When the assessment of your home is done, that informs how much you'll pay in property taxes.

The market value of a home, on the other hand, is essentially how much it would sell for today based on current market trends. This price is based on several factors, including location and outside and inside conditions. Your real estate agent will also consider homes that have recently sold in the area to understand the market in your specific neighborhood. They'll also consider improvements that you've made to the property, but the market value focuses greatly on what potential buyers are looking for.

We're here to help

Knowing what is involved financially in selling your home can help you anticipate costs, strategize expenses, and better understand the negotiation process. 

In the end, having an idea of where your money will go helps plan your next move with confidence — a feeling that’s priceless.

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