What Are Net Proceeds?
Net proceeds are the amount the seller receives following the sale of an asset after all costs and expenses are deducted from the gross proceeds. Depending on the asset sold, the costs may account for a small percentage of the gross proceeds or a substantial percentage of the gross proceeds. Capital gains taxes are paid on the net proceeds of a sale rather than the gross proceeds.
- Net proceeds are the amount the seller takes home after selling an asset, minus all costs and expenses that have been deducted from the gross proceeds.
- The amount that constitutes the net proceeds could be marginal or substantial, depending on the asset that has been sold.
- Capital gains taxes must be paid on the net proceeds of a sale, not the gross proceeds.
Understanding Net Proceeds
Net proceeds are the final amount a seller receives from the sale of an asset after all costs have been taken into consideration. Depending on the asset, the cost can include fees, commissions, advertising costs, and taxes. It's important to be aware of all of the costs that go into a sale of an asset as it will help determine the appropriate selling price.
One area that commonly impacts net proceeds from a sale is the sale of a house. When calculating net proceeds on a home sale, the outstanding mortgage or other liens on the property, commission for the seller’s agent and 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 mortgage 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, consider an investor who 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.
Example of Net Proceeds
As mentioned, selling a home is an area where costs are varied that determine the net proceeds of the sale. Let's say Jim is selling his house for $100,000. With the sale comes many costs that first need to be summed to arrive at total costs.
The costs associated with the sale of the house are:
- Real estate agent fee: $5,000
- Advertising costs: $1,000
- Closing costs: $6,000
- Total Costs: $12,000
To arrive at the net proceeds we would subtract the total costs from the sales cost of the house.
Net Proceeds = $100,000 - $12,000 = $88,000