Closing the sale of a home means there are costs for both the buyer and the seller. In most cases, the buyer paid the closing costs. However, those fees and taxes are considered part of the negotiating process. Many times, buyers will ask the sellers to cover these costs when putting in an offer to purchase.
What does it mean to a seller if they will cover closing costs? It simply means that you will receive a smaller profit from the sale. This is important to consider when not only pricing the home, but also accepting an offer to purchase.
What are the closing costs that the seller might find they need to cover? These can include:
Real estate commissions: The seller of the home will most likely cover the cost of the real estate commission. This figure is around 6% of the purchase price. On a $200,000 home, the commission alone will be $12,000. This is usually higher than all of the buyer’s closing costs.
Title insurance: Lenders require insurance to protect the asset (the home) that secures the loan. The title insurance premium will be paid by the seller. This is done just in case title issues arise. If a homeowner defaults on a loan with a faulty title, this insurance allows the lender to recoup its money.
Another reason seller’s typically pay for title insurance is because it is designed to protect buyers from defects or liens in the history of the title.
Taxes: If you are selling one home and purchasing another, you may not have to pay taxes on the home sale proceeds. However, in other cases, your tax bill depends upon how long you have been in the home. If you’ve owned the home for less than a year, you would pay taxes at your regular rate. However, if you have lived in the home for at least 2 of the past 5 years, you can pocket up to $250,000 tax free ($500,000 for couples filing a joint tax return).
If your profits exceed that amount, then you will be dealing with capital gains. Long-term gains are taxed depending on your income. Couples making $72,500 or less will pay no capital gains. Those making up to $450,000 will pay 15 percent of their profits, and those earning more pay 20 percent.
Regardless of the situation, sellers should always contact a tax adviser to make sure they are reporting any proceeds correctly.
Other costs: There may be other costs incurred by the seller as well. You may need to pay transfer taxes and recording fees in order to transfer the title. Seller’s also sometimes cover the homeowners association dues for a period of time. Finally, it is also very common for sellers to offer to pay for a one-year home warranty. This can give buyers peace of mine about first-year costs.
You are now ready to walk into closing knowing what to expect and what it will end up costing you.
Check out all of our posts in our home buying and selling series!
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The blog and its opinions are expressly those of its author and do not convey the opinions or strategies of the Credit Union and should not be considered financial advice. CommunityAmerica’s mortgage offers are subject to credit approval and terms may vary based on conditions.
