According to the National Association of Realtors, parents gifting money to their children to help purchase a first home is a common experience. Gifting money is a type of down payment assistance that can help them realize their dreams of homeownership.
What is Return of Capital?
Despite their home being their largest asset, many homeowners never calculate their true return on investment if they want to sell their home. When they do sell, they will receive what is known as return of capital. Viewing your residence as an investment rather than a sunken cost can make all the difference when trying to figure out what return of capital is.
When Do I Get Return of Capital?
Return of capital is a payment received from an investment that is not considered a taxable event since it’s not considered income. Return of capital happens when an investor or homeowner gets part of his or her original investment back.
Again, these payments are not considered taxable income or capital gain if you sell your home for more than its original worth minus the investment’s cost. If an investor receives an amount that is less than or equal to the cost, the payment is a return of capital and not a capital gain. However, the money you make selling your home will be considered capital gain and therefore taxable if the profit exceeds $250,000. If you are married, it is considered capital gain if you made more than $500,000.
Return of Capital versus Return on Investment
Return of capital is not the same thing as return on investment (ROI). ROI simply helps you determine how well an investment is doing and if an investment is worth your time and money. Compare that to return of capital, which is payment received from an investment.
Calculating Return of Capital
Since your home will be one of your biggest assets, you will need to know how it performs financially. To calculate the return of capital you can receive when you sell your home, consider the following approach. You can always change it as needed to fit your situation:
- Add up costs that were incurred when you bought the home such as your down payment, attorney fees, closing costs, and any other fees.
- Add up your total costs of homeownership including the calculation of the total payments made to principal and interest, taxes and insurance, repairs and maintenance, and other expenses such as HOA dues or condo fees.
- Add up your selling costs including real estate agent fees, closing costs expense, and state and local taxes.
- Ask your loan officer for your loan payoff amount. If you haven’t yet sold your home, you can calculate your loan payoff amount using an online amortization schedule or call your loan officer. If you have already sold your home, you will have this number.
Now that you have all of the numbers you need, you can find out your estimated return of capital using the following equation:
Sale Price – Buying/Owning/Selling Costs – Loan Payoff Amount = Total Profit/(Loss)