Selling a house which is not paid off

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FB01
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Selling a house which is not paid off

Post by FB01 »

Hi,

Just curious if anyone can explain how the process works in terms of money.

E.g Bought a house for 1 million and paid 20% dp. Got loan of 800K.

Now after 5 years, if I sell the house for 1.5 million, what happens about the unpaid mortgage as the house is not paid of. How does it affect me?

Any insight would be helpful.

-JR
Thanks, | FB
mhalley
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Re: Selling a house which is not paid off

Post by mhalley »

If you sell the house for more than the mortgage amount, the mortgage gets paid off, and you get a check for the rest (minus closing costs). If you sell for less than the mortgage, you write a check to the bank to pay off the mortgage, unless they agree to a short sale.
joebh
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Re: Selling a house which is not paid off

Post by joebh »

FB01 wrote:Now after 5 years, if I sell the house for 1.5 million, what happens about the unpaid mortgage as the house is not paid of. How does it affect me?
At the closing a check will be handed to a representative of the company holding your loan, discharging your mortgage.
The remainder (if any) will be handed to you.

If you sell the house for more than the remainder of the mortgage, you are fine. You'll walk out with a check.
If you sell the house for less than the remainder of the mortgage (you are "under water"), you'll need to give them a check for the difference.
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ResearchMed
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Re: Selling a house which is not paid off

Post by ResearchMed »

FB01 wrote:Hi,

Just curious if anyone can explain how the process works in terms of money.

E.g Bought a house for 1 million and paid 20% dp. Got loan of 800K.

Now after 5 years, if I sell the house for 1.5 million, what happens about the unpaid mortgage as the house is not paid of. How does it affect me?

Any insight would be helpful.

-JR
At the closing, the Buyer (of your home) will have a certified check (or some other secure payment that can't bounce) in the amount needed above any down payment.

From that money, the amount needed to payoff your mortgage (or HELOC, etc.) will be removed, and paid to your lender.
Any amounts due to real estate agents will then be removed and paid to them. Likewise, some taxes/etc., might be prorated and paid.
You'll get a check for the remainder.

IF the house is under water, not your situation, but so you know, then the check from the buyer AND a check from you will need to total the payoff amount of your mortgage, plus any additional amounts (see above).
Otherwise, one gets into various other scenarios (like partial loan forgiveness, a short sale, etc.).

RM
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dm200
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Re: Selling a house which is not paid off

Post by dm200 »

FB01 wrote:Hi,
Just curious if anyone can explain how the process works in terms of money.
E.g Bought a house for 1 million and paid 20% dp. Got loan of 800K.
Now after 5 years, if I sell the house for 1.5 million, what happens about the unpaid mortgage as the house is not paid of. How does it affect me?
Any insight would be helpful.
-JR
So, now your mortgage payoff might be, say, $750,000 and the lien on the property is held by your mortgage lender. So, you find a buyer willing to pay $1.5 Million. First possibility - buyer paying cash. At settlement, buyer would have arranged to pay off mortgage ($750,000) and pay you the net ($750,000). When all the documents are processed, and the mortgage company receives the payoff, you will have $750,000 and the buyer will have a clear title recorded.

Second possibility - buyer has down payment, say, $100,000, and approval of mortgage of $1.4 Million. At settlement, or after docs processed, etc. , you would get $750,000 and the lien for $1.4 Million would be recorded on the title to the property.

For the most part, your having a mortgage outstanding will not significantly affect your selling the house. An exception would be if the outstanding mortgage payoff is MORE than the sale price. If the mortgage payoff is, say, $750,000 and you could not sell the house for more than $700,000. Then things get more complicated.
adamthesmythe
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Re: Selling a house which is not paid off

Post by adamthesmythe »

> what happens about the unpaid mortgage as the house is not paid of. How does it affect me?

You can't provide clear title to the buyer unless the mortgage is paid off.

As noted above this happens at closing.
nchowrin
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Re: Selling a house which is not paid off

Post by nchowrin »

dm200 wrote:
FB01 wrote:Hi,
Just curious if anyone can explain how the process works in terms of money.
E.g Bought a house for 1 million and paid 20% dp. Got loan of 800K.
Now after 5 years, if I sell the house for 1.5 million, what happens about the unpaid mortgage as the house is not paid of. How does it affect me?
Any insight would be helpful.
-JR
So, now your mortgage payoff might be, say, $750,000 and the lien on the property is held by your mortgage lender. So, you find a buyer willing to pay $1.5 Million. First possibility - buyer paying cash. At settlement, buyer would have arranged to pay off mortgage ($750,000) and pay you the net ($750,000). When all the documents are processed, and the mortgage company receives the payoff, you will have $750,000 and the buyer will have a clear title recorded.

Second possibility - buyer has down payment, say, $100,000, and approval of mortgage of $1.4 Million. At settlement, or after docs processed, etc. , you would get $750,000 and lien for $1.4 Million would be recorded on the title to the property.

For the most part, your having a mortgage outstanding will not significantly affect your selling the house. An exception would be if the outstanding mortgage payoff is MORE than the sale price. If the mortgage payoff is, say, $750,000 and you could not sell the house for more than $700,000. Then things get more complicated.
You should note that selling expenses, closing costs & realtor commission, etc., will also be paid at closing out of that $750,000. On a sale price of $1.5 million that would be about $90K. You should also be aware that you could also be liable for capital gains tax on the profit. You net profit would be $1.5 million - $1 million cost - $90K selling expense = $410K profit. If you're single, and assuming you've lived in that house as your primary residence for at least 2 of those 5 years, you will owe long term capital gains on any profit in excess of the $250K federal credit. If you lived there less than 2 years you don't get that credit and would owe taxes on the total profit of $410K. So, $410K - $250K = $160K taxable income. Federal long term capital gains tax is now 20%, so that would be $32K in taxes. More if you live in a state with an income tax. Those state taxes would possibly be withheld by the title company at closing. When I sold my home in California, some years ago, I paid both a Federal capital gains tax and a state capital gains tax. If you're married you get a $500K credit and wouldn't owe any tax.
dpc
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Re: Selling a house which is not paid off

Post by dpc »

Don't worry, the title company does this for a living. The mortgage must be paid before the house can be sold. This will happen at closing. All will be explained in excruciating detail as you sign your name about 50 times.
"Worrying is like paying interest on a debt that you might never owe" -- Will Rogers
Jawbreaker
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Re: Selling a house which is not paid off

Post by Jawbreaker »

nchowrin wrote:
dm200 wrote:
FB01 wrote:Hi,
Just curious if anyone can explain how the process works in terms of money.
E.g Bought a house for 1 million and paid 20% dp. Got loan of 800K.
Now after 5 years, if I sell the house for 1.5 million, what happens about the unpaid mortgage as the house is not paid of. How does it affect me?
Any insight would be helpful.
-JR
So, now your mortgage payoff might be, say, $750,000 and the lien on the property is held by your mortgage lender. So, you find a buyer willing to pay $1.5 Million. First possibility - buyer paying cash. At settlement, buyer would have arranged to pay off mortgage ($750,000) and pay you the net ($750,000). When all the documents are processed, and the mortgage company receives the payoff, you will have $750,000 and the buyer will have a clear title recorded.

Second possibility - buyer has down payment, say, $100,000, and approval of mortgage of $1.4 Million. At settlement, or after docs processed, etc. , you would get $750,000 and lien for $1.4 Million would be recorded on the title to the property.

For the most part, your having a mortgage outstanding will not significantly affect your selling the house. An exception would be if the outstanding mortgage payoff is MORE than the sale price. If the mortgage payoff is, say, $750,000 and you could not sell the house for more than $700,000. Then things get more complicated.
You should note that selling expenses, closing costs & realtor commission, etc., will also be paid at closing out of that $750,000. On a sale price of $1.5 million that would be about $90K. You should also be aware that you could also be liable for capital gains tax on the profit. You net profit would be $1.5 million - $1 million cost - $90K selling expense = $410K profit. If you're single, and assuming you've lived in that house as your primary residence for at least 2 of those 5 years, you will owe long term capital gains on any profit in excess of the $250K federal credit. If you lived there less than 2 years you don't get that credit and would owe taxes on the total profit of $410K. So, $410K - $250K = $160K taxable income. Federal long term capital gains tax is now 20%, so that would be $32K in taxes. More if you live in a state with an income tax. Those state taxes would possibly be withheld by the title company at closing. When I sold my home in California, some years ago, I paid both a Federal capital gains tax and a state capital gains tax. If you're married you get a $500K credit and wouldn't owe any tax.
I thought that you do not pay capital gains taxes on the profit if it is used to purchase a new home, and I forget how long you have to do that. So if this is the OP's primary residence, and they will be buying another house to live in after this sale, isn't the profit exempt from taxes?
Gill
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Re: Selling a house which is not paid off

Post by Gill »

Jawbreaker wrote:I thought that you do not pay capital gains taxes on the profit if it is used to purchase a new home, and I forget how long you have to do that. So if this is the OP's primary residence, and they will be buying another house to live in after this sale, isn't the profit exempt from taxes?
That was the law up until about 30 years ago. It is no longer the case.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Jawbreaker
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Re: Selling a house which is not paid off

Post by Jawbreaker »

Gill wrote:
Jawbreaker wrote:I thought that you do not pay capital gains taxes on the profit if it is used to purchase a new home, and I forget how long you have to do that. So if this is the OP's primary residence, and they will be buying another house to live in after this sale, isn't the profit exempt from taxes?
That was the law up until about 30 years ago. It is no longer the case.
Gill
Good to know.

I wonder how often the government will adjust those max profit exemptions. I plan to sell my house in 20-25 years, and with just basic inflation, that'll be a big tax bill if those limits aren't changed.
pshonore
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Re: Selling a house which is not paid off

Post by pshonore »

Gill wrote:
Jawbreaker wrote:I thought that you do not pay capital gains taxes on the profit if it is used to purchase a new home, and I forget how long you have to do that. So if this is the OP's primary residence, and they will be buying another house to live in after this sale, isn't the profit exempt from taxes?
That was the law up until about 30 years ago. It is no longer the case.
Gill
Prior to when the law changed in the 1997, CG tax on the profit on sale of a house was deferred as long as you bought a more expensive house. Those profits have not been "forgotten" and I believe serve to reduce the basis of a home you are now selling under the new rules.
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Re: Selling a house which is not paid off

Post by jimb_fromATL »

pshonore wrote:
Gill wrote:
Jawbreaker wrote:I thought that you do not pay capital gains taxes on the profit if it is used to purchase a new home, and I forget how long you have to do that. So if this is the OP's primary residence, and they will be buying another house to live in after this sale, isn't the profit exempt from taxes?
That was the law up until about 30 years ago. It is no longer the case.
Gill
Prior to when the law changed in the 1997, CG tax on the profit on sale of a house was deferred as long as you bought a more expensive house. Those profits have not been "forgotten" and I believe serve to reduce the basis of a home you are now selling under the new rules.
I've often wondered if the IRS has any way to know --or really even cares -- about capital gains taxes that were deferred that long ago.

jimb
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jimb_fromATL
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Re: Selling a house which is not paid off

Post by jimb_fromATL »

I wonder how often the government will adjust those max profit exemptions. I plan to sell my house in 20-25 years, and with just basic inflation, that'll be a big tax bill if those limits aren't changed.
Bear in mind that the potentially taxable gain is on the amount by which the profit exceeds the $500K (married) or $250K (single) exemption. That's the difference between your cost basis and the amount realized after the cost of the sale. NOT the sale price; and not really related to the amount you might walk out with from closing.

Unless you live in a very high cost of housing area like CA or the Northeast or a few other places, chances are a lot of folks won't exceed the $500K limit even in 25 years. With MEDIAN HOME PRICES in the US of around $250,000 and the historical long term average appreciation of around 4-5% for several decades before the crash of 2008, and not including bubble markets, a married couple would be lucky to have any taxable gain over the exemption in perhaps 20-25 years.

I'd guess that people who do live in even some of the high-cost-of-housing (not bubble) areas are more likely to be moving in the average of 5 to 7 years or so and not having that much gain every 2 out of 5 years either.

If you really are in danger of having more than $500K or $250K profit -- if you call that a danger -- then the simple solution is to sell before the profit is that much, and start the clock over again.

jimb
nchowrin
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Re: Selling a house which is not paid off

Post by nchowrin »

Jawbreaker wrote:
Gill wrote:
Jawbreaker wrote:I thought that you do not pay capital gains taxes on the profit if it is used to purchase a new home, and I forget how long you have to do that. So if this is the OP's primary residence, and they will be buying another house to live in after this sale, isn't the profit exempt from taxes?
That was the law up until about 30 years ago. It is no longer the case.
Gill
Good to know.

I wonder how often the government will adjust those max profit exemptions. I plan to sell my house in 20-25 years, and with just basic inflation, that'll be a big tax bill if those limits aren't changed.
The law was set in 1986 and those amounts of $250K for singles and $500K for married have never been updated, nor adjusted for inflation. Adjusted for inflation, both of those numbers would have at least doubled. I guess it's hard to feel sorry for those who make so much money off their home that they have to pay taxes. Most homeowners do not. I wouldn't hold your proverbial breath waiting for that to happen.
nchowrin
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Re: Selling a house which is not paid off

Post by nchowrin »

jimb_fromATL wrote:
pshonore wrote:
Gill wrote:
Jawbreaker wrote:I thought that you do not pay capital gains taxes on the profit if it is used to purchase a new home, and I forget how long you have to do that. So if this is the OP's primary residence, and they will be buying another house to live in after this sale, isn't the profit exempt from taxes?
That was the law up until about 30 years ago. It is no longer the case.
Gill
Prior to when the law changed in the 1997, CG tax on the profit on sale of a house was deferred as long as you bought a more expensive house. Those profits have not been "forgotten" and I believe serve to reduce the basis of a home you are now selling under the new rules.
I've often wondered if the IRS has any way to know --or really even cares -- about capital gains taxes that were deferred that long ago.

jimb
The title company reports to the IRS. Believe me, the IRS cares! You can always 'forget' for plead ignorance, but you take your chances then with being accused of tax fraud, which would cost you lots more.
nchowrin
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Re: Selling a house which is not paid off

Post by nchowrin »

jimb_fromATL wrote:
I wonder how often the government will adjust those max profit exemptions. I plan to sell my house in 20-25 years, and with just basic inflation, that'll be a big tax bill if those limits aren't changed.
Bear in mind that the potentially taxable gain is on the amount by which the profit exceeds the $500K (married) or $250K (single) exemption. That's the difference between your cost basis and the amount realized after the cost of the sale. NOT the sale price; and not really related to the amount you might walk out with from closing.

Unless you live in a very high cost of housing area like CA or the Northeast or a few other places, chances are a lot of folks won't exceed the $500K limit even in 25 years. With MEDIAN HOME PRICES in the US of around $250,000 and the historical long term average appreciation of around 4-5% for several decades before the crash of 2008, and not including bubble markets, a married couple would be lucky to have any taxable gain over the exemption in perhaps 20-25 years.

I'd guess that people who do live in even some of the high-cost-of-housing (not bubble) areas are more likely to be moving in the average of 5 to 7 years or so and not having that much gain every 2 out of 5 years either.

If you really are in danger of having more than $500K or $250K profit -- if you call that a danger -- then the simple solution is to sell before the profit is that much, and start the clock over again.

jimb
Yes, there's now an incentive to sell your home every 2 years or so to avoid the capital gains. Of course, if you live in CA then that also resets you homeowners tax exemption, which is a lot like rent control. Once you buy your house your property taxes stay very low, until you sell and buy a new house. If you live in your home very long then selling your home and buying a new home will likely quadruple your property taxes or more.
randomguy
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Re: Selling a house which is not paid off

Post by randomguy »

nchowrin wrote:
Jawbreaker wrote:
Gill wrote:
Jawbreaker wrote:I thought that you do not pay capital gains taxes on the profit if it is used to purchase a new home, and I forget how long you have to do that. So if this is the OP's primary residence, and they will be buying another house to live in after this sale, isn't the profit exempt from taxes?
That was the law up until about 30 years ago. It is no longer the case.
Gill
Good to know.

I wonder how often the government will adjust those max profit exemptions. I plan to sell my house in 20-25 years, and with just basic inflation, that'll be a big tax bill if those limits aren't changed.
The law was set in 1986 and those amounts of $250K for singles and $500K for married have never been updated, nor adjusted for inflation. Adjusted for inflation, both of those numbers would have at least doubled. I guess it's hard to feel sorry for those who make so much money off their home that they have to pay taxes. Most homeowners do not. I wouldn't hold your proverbial breath waiting for that to happen.
It was by Bill Clinton in 1997. So it is only like 20 years without adjustment not 30:) Things like the 3k deduction for losses (set in the early 80s), ACA income limits (200k/250k) of capital gains taxation, SS taxation and a few others are not indexed for inflation. Unless there is total tax reform, I wouldn't count on any them getting adjusted.
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