What are 'Net Proceeds'
Net proceeds is the amount received by the seller after all costs and expenses are deducted from the gross proceeds arising from the sale of an asset. Depending on the asset sold, such costs may account for a marginal percentage of the gross proceeds or a substantial percentage of the gross proceeds. Capital gains taxes are generally paid only on the net proceeds of a sale, rather than the gross proceeds.
BREAKING DOWN 'Net Proceeds'Net proceeds from selling a house differ from the seller’s equity in the home because net proceeds account for the real estate agent’s fee and seller’s closing costs. When calculating net proceeds on a home sale, the outstanding mortgages or other liens on the property, commission for the seller’s agent and for the buyer’s agent, excise tax and other closing costs owed by the seller are subtracted from the gross sale price of the home. If negative net proceeds result, the seller must provide cash at the time of closing to pay off the mortgages or receive the bank’s approval for a short sale.
Net Proceeds and Capital Gains Taxes
Income from selling stocks, mutual funds, property or other assets is reported on a personal or corporate tax return. Taxes are paid on the asset’s capital gains rather than on its selling price.
When calculating capital gains or losses, the amount paid to acquire the asset, called its basis, must be known. For example, an investor purchases $6,000 in stock and pays a $24 commission. The stock’s basis is $6,024. When an asset is inherited, its basis is the fair market value on the date of the person’s death, regardless of the amount paid for the asset. Net proceeds must be calculated as well. For example, the same investor sells the stock for $8,000 and pays a $32 commission. The net proceeds are $7,968. The basis is subtracted from the asset’s net proceeds. Because $7,968 - $6,024 = $1,944, the capital gain is $1,944.
Examples of Net Proceeds
In January 2015, Brandywine Realty Trust announced the sale of two office properties and a hotel. After closing costs and transaction costs, net proceeds from the office properties totaled $35.9 million. After debt repayment, transaction costs and holdbacks, net proceeds from the hotel totaled $6.1 million. Total net proceeds were expected to fund current development commitment, reduce debt and cover general corporate purposes.
In July 2016, Transocean Inc., a fully owned affiliate of offshore drilling company Transocean Ltd., announced its initial public offering (IPO) of senior unsecured notes worth $1.25 billion. The notes carry a 9% interest rate and mature by 2023. After subtracting purchase discounts and offering costs, net proceeds are anticipated to be approximately $1.21 billion. Part of the net proceeds will be used for purchasing 6.5% senior notes maturing in 2020, 6.375% senior notes maturing in 2021 and 3.8% senior notes maturing in 2022 for up to $1 billion in cash. Part of the net proceeds will also be used for refinancing debt and for general company activities.