What To Do With Home Sale Proceeds

Abby Shemesh
Published: September 15, 2022 | Updated: September 14, 2022

Selling your home at a profit is a financially rewarding experience. However, knowing what to do with home sale proceeds can be difficult. There are several options to consider: you can invest the money from the sale of your home, use the money to pay down debt, or purchase another property. In this article, we’ll consider the impacts of each alternative.

What To Do With Home Sale Proceeds

What Happens When You Sell Your House for a Profit?

If you’ve recently sold your home for a profit, congratulations! You’ve got some extra money that you can use to your advantage.

However, it’s essential to determine how much of the money you receive is clear from other expenses related to the sale and if you’ll owe home sale proceeds tax.

Typical costs associated with a house sale include real estate agent commissions, title fees, escrow fees, and prorated property taxes. You’ll want to ensure that you fully pay all costs associated with selling your house.

The net proceeds from home sales are subject to capital gains taxes in certain conditions. To qualify for an exemption from capital gains taxes, you must meet the ownership and use tests. Under the ownership and use test, the home must have been your primary residence for at least two of the prior five years before the sale.

If you meet the ownership and use tests, you can exclude up to $250,000 in capital gains as a single tax filer or $500,000 as a married filing jointly couple. Thus, if your gain is lower than the capital gain exclusion limits, it may be entirely tax-free. If your net proceeds from the sale exceed the exclusion limits, the remaining amount will be subject to capital gains taxes based on your appropriate tax rate.

If you have sold another primary residence in the past two years, you may be ineligible for the capital gains exemption.

What if I Am a Seller Financer Who Sells a Balloon Note on a Mortgage?

Sometimes, owners choose to offer their buyers private seller financing with a balloon note at the end of the mortgage. Offering seller financing to buyers is advantageous to home buyers and sellers in certain situations. For instance, a seller can offer buyers customizable payment terms and charge a higher interest rate than a conventional mortgage note. If the seller doesn’t want to assume the risk of the financing and needs access to their funds before the buyer pays off the mortgage, they can sell the note to a mortgage buyer.

Home buyers benefit from seller financing since they typically make lower interest-only payments for a certain period. If they cannot meet the balloon payment when it comes due, they can attempt to refinance the loan or find another property that meets their needs.

use proceeds from home sale

How Can I Best Use the Net Proceeds From a Home Sale?

Deciding the appropriate way to use your gains from a home sale depends on your financial goals. Some people use proceeds from the sale for paying down debt or investing in the stock market, while others use the money as a down payment on a new property. Here are a few options to consider when deciding what to do with house sale proceeds.

Paying Down Debt

You may have debts that you’re tired of paying. Credit cards, student loans, auto loans, and other obligations can take a sizeable chunk of your monthly income. Using your home sale proceeds to pay off debt can release you from regular monthly payments to your creditors. You can use the additional money towards saving for retirement, investments, or personal interests, like travel.

Down Payment for a New Home

Many people use the gain on the sale of their home as a down payment on a new house. Those seeking to move to a new area, a house with more living space, or other attributes that their current primary residence doesn’t have can easily use the proceeds to purchase another place that fits their needs.

If you don’t have a use for another home, you can use the proceeds as a down payment on a rental property. Rental properties provide an opportunity for investment and a regular income stream. You can purchase a property you believe provides the best chances for a return on your investment and put it on the rental market.

If the net proceeds from your home sale are significant, you may consider purchasing several rental properties.

Invest in the Stock Market

Sometimes, people choose to invest their proceeds in stocks, money market funds, or other liquid investments. Investing in the stock market provides opportunities to achieve a rate of return that may be higher than that you would obtain by purchasing another property.

For instance, if you invest a $100K gain from selling your property in a diversified stock portfolio with an annual average return of 8%, you’ll net $8K in profits your first year. If you keep your money invested for ten years and receive the same annual 8% return, your portfolio will have a value of $215,892.50 at the end of ten years — nearly a $116K gain.

Of course, there is some risk to investing in the stock market. Market dips aren’t uncommon, and you can’t guarantee the same rate of return each year. However, if you stay on top of your investments and make adjustments when necessary, you can potentially obtain significant returns.

should you sell your house and invest

Should I Sell My House and Invest the Money?

Deciding whether to sell your house and invest the money is a question of your financial goals. If you need your residence to live in, selling it won’t make much sense unless you have another place to stay.

However, individuals seeking to downsize their living arrangements or who have another place to reside may be wise to sell their homes and invest the money. If the value of your home has significantly increased, you may be able to realize a sizeable gain you can use towards other investment opportunities.

Before deciding to sell your home and invest the money, it’s wise to speak with a personal finance or wealth management advisor. An advisor can help you determine the net proceeds you may receive from your home sale and review your potential options. If you decide to put your money in the stock market, they can help you set up an investment portfolio that suits your risk tolerance and returns expectations.

If you’d prefer to use your gains towards purchasing a new home, a real estate professional can help you find a home with a sale price and options that meet your buying criteria. A real estate professional can also connect you with lenders who offer mortgage rates in line with your loan criteria.

How Long To Reinvest Proceeds From Home Sales?

Determining how long to keep your proceeds from your home sale in a new investment depends on your personal financial goals. Some may keep their money invested for years until they are ready to retire. Others seek to make a specific return on their investment before selling it and using the money for other purposes. If you’re unsure how long to keep your cash reinvested in new opportunities, seek the assistance of a financial advisor to determine an appropriate time length for your investment.

The Takeaway

Deciding what to do with the proceeds from a home sale is something you should carefully deliberate. Your decision-making process is a bit easier if you need the money for a down payment on another home. However, if you don’t need the money to buy a new house, you can use it to pay off debt, purchase an investment rental property, or set up an investment portfolio. Whatever you choose, make sure your decision aligns with your personal goals.