Gross proceeds are the amount that a seller receives from the sale of an asset. These proceeds include all costs and expenses. Gross proceeds are often not the taxable amount from the sale. Instead, net proceeds are used for that calculation. Net proceeds are the amount after subtracting out fees and expenses. This is the actual amount the seller takes home. Costs and expenses can be a substantial amount of gross proceeds, leading to a smaller amount of net proceeds.
Gross proceeds are used for reporting purposes. For tax reporting, gross proceeds are listed. Calculations are performed to arrive at the net proceeds, which is the taxable amount. Starting with gross proceeds, various expenses and other deductions are removed (they are still reported on tax forms). Subtracting those costs leaves net proceeds. Net proceeds are generally the taxable amount.
For real estate tax reporting, Form 1099-S is used to report gross proceeds on the sale or exchange of real estate property. This form is titled ‘Proceeds From Real Estate Transactions.
When selling a home, the seller receives gross proceeds. Expenses (i.e., closing cost) that are taken out include:
- Realtor commissions (5% - 6% of property’s value)
- Title insurance
- Prorated property taxes
- Excise tax
- Mortgage payoff
- Potentially a contractor lien
- Any HOA dues that need to be paid
- Potentially special assessment
- Furniture staging
Some sellers may look at only the net proceeds when deciding what to sell a property for. However, the property still needs to be priced based on nearby, similar properties. Going with net proceeds can generate a price that is higher than surrounding properties. Therefore, the seller should focus on gross proceeds (the price before cost) as the listing price.
