DISCLAIMER: As a friendly reminder, this blog post is meant to be used for educational purposes only, not for professional tax advice. If you need assistance navigating the tax implications of selling a house after owning it for one year, HomeLight always encourages you to reach out to your own advisor. Unforeseen circumstances can precipitate a move sooner than expected. The most common reason for selling a house after one year is job relocation, according to Brad Gore, a top agent who works with 74% more single-family homes than the average Branson, Missouri, agent. Other reasons can include: Unexpected situations signaling the need to move within a year of purchasing a home can prompt questions: “Has my home appreciated enough that I will make a profit … or break even?” or “Can I sell a home after owning it for one year?” You can sell a home whenever you want, but expect financial consequences if you have little equity in it. Don’t forget all the fees associated with selling a house – and the potential for owing capital gains tax. These are all considerations that form the basis of the proverbial “5-year rule” for selling a house.
The 5-year rule is pretty self-explanatory. Generally, the longer you keep your house, the more likely you are to make a profit when you sell it. Those who sell their property before owning it five years risk losing money on their investment. There are a number of reasons for this, including lack of equity accumulated in the home and insufficient appreciation – an increase in property value. Appreciation derives from a variety of factors, some of the most common of which include: The latest average appreciation rate in the U.S. is currently around 15.7%, according to the National Association of Realtors. That’s up from a rate of 14.3% a year ago. In comparison, it was only 4% in 2019. No matter how long you have lived in your home, it’s important to know what the property is worth in order to make wise decisions about selling. Find out what your home might be worth by using HomeLight’s Home Value Estimator. This free tool uses your property information and local housing market data to deliver a preliminary home value. It’s a great starting point to get a ballpark estimate of your home’s worth, but for a detailed evaluation, we recommend getting a full comparative market analysis from a top real estate agent. Contact an experienced agent to put together a comparative market analysis. They compare your home’s features, size, location, age, condition, and other details with those of similar properties in your area that have recently sold. This provides a timely snapshot of your home’s market value. You could also contact a professional appraiser to get a more accurate valuation. An experienced, licensed, and certified appraiser performs an even more in-depth assessment of your home against verified recent home sales to really pinpoint its current value. You can sell your house after one year. But, should you? Some very real personal or financial issues may be pushing you toward a sale. Just be prepared for potential drawbacks. You may find a significant downside of selling your home such a short time after purchasing it. “You’ll probably lose money,” Gore speculates. “At best, you might break even. Like any investment, you don’t get profit if you hold it a short time.” Here are some of the common concerns you may face: If you decide that selling your home doesn’t make financial sense after only one year, but you still need to move, there are other options you can explore. Keep in mind that selling your home at a loss can still incur tax obligations. In most cases, canceled – or forgiven – debt is considered taxable income. That can include a short sale, foreclosure, deed in lieu of foreclosure, or loan modification. Gore recommends forming a team, consisting of a real estate agent, your mortgage broker, and a CPA. “Tax issues are complicated,” he acknowledges. “It’s worth the cost.” Only you can navigate the determining factors regarding whether you should sell your house after one year or come up with an alternate solution. If your home has experienced significant appreciation, it’s possible to break even if you sell within a year of purchase. However, it’s more likely that you’ll have a loss. “It’s not uncommon to sell after one year,” Gore says. In fact, the amount of time people keep their homes is contracting, with the average now at just seven years. By selling after a year or less, you’re liable to incur expenses such as closing costs, moving costs, and capital gains. If you’re paying for the home with a typical mortgage, you will not have accrued much, if any, equity in that timeframe. You can check to see where you might stand with this amortization schedule.
To make money on your home sale, it needs to have appreciated in value more than the sum of all the selling fees you will accrue when moving. Prep, staging, closing costs, inspections, real estate commissions, and other fees associated with selling your home add up. Expect to pay 9%-10% of the sale price. A breakdown of the typical costs associated with selling can look like this: To get a better idea of what you’ll have to pay at closing, turn to HomeLight’s Closing Costs Calculator. Plug in your information to get a free estimate of the fees you might incur when selling your home. Gore works with an investor client who often buys homes at auction, which he fixes up and sells the following year. That allows him to bypass many of the typical transaction fees, reducing his costs to 1%-2% of the purchase price. For a $200,000 house, Gore’s client pays about $2,500 in fees. “Buying a short sale or foreclosure results in few fees,” Gore recaps, “but when you sell, there’s a significant jump in the fees you pay.” For his client, those fees – including real estate agent commission, taxes, closing costs, and possibly more – total up to roughly 10%, or $20,000. That’s on top of the cost to fix up the properties. Your home is a capital asset in the eyes of the IRS. Therefore, when you sell it, the net profit is typically taxed. Calculating your tax debt is complicated – and becomes even more so if you sell a home after just one year, due to short-term capital gains tax. Under the capital gains tax exclusion, in the sale of a primary residence, the first $250,000 of profits (or $500,000 for a married couple filing jointly) is typically not taxed if you live in your home for at least two of the five years prior to the sale. Any profit over and above that threshold is subject to taxation. While it’s unlikely that your home will have appreciated in value enough in a year or less to produce that kind of profit, you still may be required to pay taxes on the sale. There are additional requirements to qualify for the capital gains exclusion, aka the Section 121 exclusion. Here are a few of the details about qualifying for the exemption: If you are selling a home less than a year after you purchased it, it might cost you because the short-term capital gains tax is charged against you as normal income, as determined by your tax bracket. For example, in 2022 there are seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. If your household falls into the 15% bracket, and you made $75,000 on the sale of your home, you might be required to pay a short-term capital gains tax of $11,250. If you owned your home for more than one year but less than two, the profit from selling it will be taxed at the lower long-term rate: 0%, 15%, or 20%, based on your capital gains tax bracket. If you don’t meet all of the requirements for the exemptions listed above, the IRS has special rules that may allow you to claim a full or partial exclusion – such as job relocation, health changes, or other unexpected circumstances. Note: Selling a second home, vacation home, or any property that isn’t your primary residence can make you liable for capital gains tax up to 20%. This could come into play if you opt to rent your home before you sell it, although you can take depreciation for a rental. Consult with a tax professional to examine your options when selling a home, especially if you have only owned it for just one year. “I wouldn’t relocate until I talk to a CPA,” Gore states. Most of the time, it makes more sense financially to stay in your home for a few years. However, life sometimes gets in the way and you have to move sooner than expected. That’s why it’s important to have a plan when you purchase a home regarding how long you expect to live on the property. If you’re currently facing a sale for relocation, before you purchase another home, ask yourself where you want to be in five or 10 years. For most of us who are not real estate investors, the 5-year rule is still a good guide to help get the most out of a home when it comes time to sell. Of course, there are opportunities to achieve a good return on your home sale after owning a property for just one year. Use HomeLight’s Agent Match to find a top agent to help strategize your next steps. No matter how long you’ve lived in your home, our data shows that the top 5% of real estate agents in the U.S. sell homes for as much as 10% more than the average agent.What is the 5-Year Rule for selling a house?
How can I find out what my home might be worth now?
Can I sell my house after one year?
Drawbacks for selling a home early
Options for if you’re facing a need to sell a home early
What happens if I sell my house after less than a year?
How much does it cost to sell my home?
Remember to factor in capital gains taxes
Long-term capital gains tax
Short-term capital gains tax
Conclusion: Stay or go
