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As of 2020, homeowners stay in a home for an average of eight years before selling. That’s twice the average tenure seen before the 2009 housing crisis. With home prices hitting an all-time high in 2021, homeowners today see greater financial incentive to stay in the same homes for longer and gain equity.
That said, there are a number of reasons why it may make sense to sell sooner than you originally planned to. But selling your home soon after buying can mean losing money, facing capital gains taxes, or paying mortgage prepayment penalties. That’s one reason why the colloquial “five-year rule” exists. This rule says you shouldn’t consider selling until you’ve lived in a home for five years — and there are good reasons for that.
Life changes unexpectedly sometimes, forcing you to make difficult decisions. In this guide, we’ll discuss some of the factors that impact how soon you can sell a house after purchase. Even selling a house after two years is perfectly practical if you go about it right.
What is the “five-year rule”?
Common thinking says sellers won’t break even on their initial home investment if they don’t stay for five years. This line of thinking comes from the transaction costs involved in buying a home in the first place, the money that many new homeowners put into improving their home, and the time it takes for the home’s market value to grow.
But, as they say, rules are meant to be broken, and the conventional wisdom didn’t account for the past few years seeing one of the biggest housing booms ever. It appears the home prices will continue to grow at least through 2021, so you may be able to sell your home sooner without losing money.
Of course, it’s not always about selling your home to make a profit. There are a number of reasons why you might sell sooner than expected.
Reasons homeowners sell sooner than expected
While most people who aren’t professional home flippers don’t plan to sell two years after purchasing, there are plenty of reasons people do end up selling soon after buying.
- Job relocation: A new career opportunity is one life change that impacts where you’ll want to live.
- Health emergency: You may need to free up equity to pay medical bills, or want to move closer to a family member who has suffered a medical emergency.
- Family changes: A new baby, kids leaving for college, or a death in the family may make you reconsider where you want to be.
- Financial changes: If someone in your household loses their job, property taxes increase, or unexpected costs arise, your mortgage may become too expensive.
- Seller’s market: With how hot many markets around the country are today, you may have gained equity in your home quickly and want to turn a profit while you can.
How soon can you sell your home without losing money?
While there may be good reason to sell your home soon after buying, doing so comes with financial risks. When you bought the house, you paid closing costs that you can’t recoup without gaining equity or the house appreciating in value. There are also costs associated with selling and moving expenses to consider.
Before you consider selling, think about something called the breakeven point.
What is the breakeven point?
The breakeven point is when you can expect to sell your home and recoup all the money you spent on purchasing it in the first place. In a normal market, housing prices tend to rise, and you’ll also gain equity as you pay your mortgage, thereby offsetting costs of ownership as well as buying and selling transaction costs.
While the breakeven point varies across markets and as mortgage rates fluctuate, it’s important to calculate it as closely as you can if you must sell soon after buying.
Calculating breakeven for your home
You can sell anytime, but it’s smart to wait at least two years before selling. By living in your home for at least two years, you can exclude up to $250,000 (or $500,000 if you’re married) of the profits of the sale from your taxes, thanks to the Two Year Ownership and Use Rule. If you can’t wait that long, let’s talk math.
To avoid taking a loss, you’ll need to make back your down payment, closing costs, and the monthly mortgage payments you’ve already made. You’ll also want to make back the property taxes and the mortgage insurance you’ve been covering every month. Calculating those numbers — which tend to be the same every month — should be simple.
From there, you must calculate how much equity you’ve accrued and/or how much of your mortgage’s balance you’ve already paid down. This calculator is a great resource for inputting your numbers. (It will take most homeowners at least two years to reach breakeven point with equity and payments, but the market fluctuates — so this is why you calculate!)
Most importantly, you must determine a realistic price for your home. Research list prices of comparable homes in your area and have a professional do a comparative market analysis or home evaluation done. You know what you bought your home for but, even if it’s only been a year, demand may have changed in your area so you could ask for more — or have to settle for less.
Finally, calculate the costs associated with selling your house. If your ultimate home sale price ensures you recoup your down payment, closing costs, to-date mortgage and insurance payments, nets enough profit to justify your equity gain, and offset the selling costs, you can sell your home soon after buying without taking a loss. (And remember, if you sell your house after two years, you’ll also get a nice tax credit.)
When does it benefit you to sell fast?
In some cases, it’s possible to turn a profit even if you sell very soon after buying. Some of the common instances in which it benefits you to sell within two years after buying are:
- You made significant renovations in a short period to increase the home’s resale value.
- Home values in your neighborhood shot up unexpectedly due to area developments, like new commercial areas or a big company moving in nearby.
- You got a good deal initially by buying your home as a foreclosure or short sale and can sell it under normal circumstances.
Other consequences of selling a home early
Yes, you can sell a house soon after buying it while still making a profit. But even if the value of your home has increased, some homeowners still learn the hard way that there are some surprising losses you could suffer.
Before listing your house, consider these other potential losses.
Capital gains taxes
To reiterate the importance of the Two Year Ownership and Use Rule, the capital gains taxes you pay on a home sale are 15% of the profits. That could be a lot of money! As long as you’ve lived in your home for at least two years and it’s your primary residence, you’ll be exempt from paying capital gains taxes if you’re selling your house after two years.
There are a few other exceptions to capital gains taxes (for example, if you have to move due to a natural disaster), so it’s a good idea to consult a tax professional before selling.
Mortgage prepayment penalty
Some lenders include clauses in their mortgages for prepayment penalties if you sell your home before a certain amount of time has passed. It’s rare, but some lenders issue these penalties because a premature sale means they’ll miss out on interest payments they would have otherwise received for years to come. They typically charge you 2-5% of the remaining balance on your loan.
Make sure you review your mortgage agreement before you sell to verify that you won’t be subject to pay these penalties.
Lowered perception among potential buyers
There’s a psychological element to selling a house soon after buying, whether you like it or not. Even if your local market has seen a big increase in demand, your home’s price may stagnate if people assume you’re selling because something is wrong with it.
This is one reason why it’s a good idea to hire a real estate agent rather than sell by yourself if you’re selling soon after buying. A real estate agent can help with marketing and alleviate concerns of potential buyers by answering all of the questions that arise and assuring them you’re not selling because there’s a problem.
Not sure where to start? Check out Orchard, which has services that are particularly helpful for people looking to line up the sale of their old home with the purchase of their new one.