What Are Net Proceeds?
Let me explain net proceeds directly: they're the amount you, as the seller, actually receive after selling an asset, once you've deducted all the costs and expenses from the gross proceeds. Depending on what you're selling, these costs might be just a small slice of the gross amount or they could eat up a big chunk. Remember, when it comes to capital gains taxes, you pay those on the net proceeds, not the gross.
Key Takeaways
Here's what you need to grasp: net proceeds are what you take home after the sale, minus all those deducted costs from the gross proceeds. The size of that net amount can vary widely based on the asset involved. And yes, capital gains taxes hit the net proceeds, not the gross.
Understanding Net Proceeds
Net proceeds are straightforward—they're the final sum you get from selling an asset after accounting for every cost. These costs depend on the asset, but they can include fees like legal or appraisal charges, expertise or tech-related fees, commissions from brokers or platforms, advertising or digital media expenses, taxes, and regulatory costs.
You should always factor in all these costs when setting your selling price; it helps you avoid surprises. Take selling a house, for instance—it's a common scenario where net proceeds get heavily affected. You subtract the outstanding mortgage or liens, commissions for both agents, excise taxes, and other seller-paid closing costs from the gross sale price. If you end up with negative net proceeds, you'll need to bring cash to closing to cover the mortgage or get bank approval for a short sale.
Net Proceeds and Capital Gains Taxes
When you sell stocks, mutual funds, property, or other assets, you report that income on your tax return, whether personal or corporate. Taxes apply to the capital gains, not the selling price itself.
To figure capital gains or losses, you need the asset's basis—the amount you paid to acquire it. For example, if you buy $6,000 in stock and pay a $24 commission, the basis is $6,024. If you inherit an asset, its basis is the fair market value on the date of death, no matter the original cost.
You also calculate net proceeds. Say you sell that stock for $8,000 with a $32 commission—net proceeds are $7,968. Subtract the basis from net proceeds: $7,968 minus $6,024 equals $1,944, so that's your capital gain.
Example of Net Proceeds
Selling a home often shows how varied costs determine net proceeds. Suppose Jim sells his house for $100,000. First, add up the costs: real estate agent fee of $5,000, advertising costs of $1,000, closing costs of $6,000, totaling $12,000.
Subtract that from the sale price: $100,000 minus $12,000 equals $88,000 in net proceeds. That's how it works—direct and to the point.
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