Property prices are their highest since the recession of 2008 and the time to sell your property is now. However, despite a significant appreciation in prices of properties, your actual profit may not be as high as you are thinking. This is because of the expenses involved with the process of selling. It is not just the commission of your real estate agent but also the costs in preparation and closing costs that eat away much of the profit you are hoping to make.
Understanding the costs of selling your home
It is important to know about the expenses associated with selling. If you do not know them, you might get a rude shock to see that your actual profit is much less than what it appears on paper. It is a big folly to assume that the difference between whatever you paid for a property and its final sale price is your profit. It becomes even more complex when you are selling an investment property as you have already spent huge amount of money on its maintenance and other expenses like insurance and taxes.
The cost of preparation
You simply cannot hope to sell your property unless you have carried out repairs to make it attractive and desirable for potential buyers. You can get the desired asking price only when your property appears to be in a top condition. Preparing your home for sale starts with tending to your lawn, doing landscaping, and some paint job to give interiors and exteriors a better look. You are in total control of preparation expenses as it is your property and you are the best judge.
This is the biggest cost of selling but also the most necessary. It could be close to 6% of the sale price of your home but very justified as your realtor brings potential buyers and negotiates with them to get you top price for your home. You can choose to sell FSBO to save this expense, but it can prove to be very difficult and tiring.
The closing costs
There are always many types of closing costs that are the responsibility of the seller. These include inspection fee, attorney fee, title fee, transfer fee, and so on. The total cost of these closing costs comes to eb around 1-2% of the value of the property.
Tax paid to Uncle Sam
You will obviously make a profit by selling your property at a higher price than you paid for it. Government charges a capital gains tax on this profit. You are allowed deferred payment if you reinvest your sale proceeds, but you cannot wish this tax away.
If you are an investor and availing depreciation benefits in your financial statements by buying and holding properties, recapture taxes will take away all these benefits. It doesn’t matter if you showed depreciation or not as IRS will always assume you benefit ted through depreciation. Fearing recapture taxes, many investors keep pumping their sale proceeds into other real estate transactions. But the sad thing is that you can defer paying recapture taxes but cannot escape them for long as you are made to pay them whenever you try to cash out the sale of your property.
Most people either do not calculate costs of selling or underestimate them before taking the decision to sell their properties. These expenses are always there, and it doesn’t mean you should not sell your property because of them. Being prepared about costs of selling allows you to take a much-informed decision and you know the amount of profit from the sale of your property.
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