After buying a house as your primary residence, you might eventually decide to move. People often assume that you can list your home on the real estate market and relocate as soon as it sells. Yet knowing the right time to sell your home is key if you don’t want to lose money on such a major investment.
There isn’t a simple answer for how long to live in a house before selling. Homeowners have many factors to consider, so the answer differs for everyone. In the guide below, our professionals from A and N Mortgage help answer the “How long should you own a house before selling it” question.
Understanding home equity, which refers to the difference between a property’s market value and the amount the homeowner still owes on their mortgage, can help when determining the right time to sell a house.
For instance, if you buy a $400,000 house and make a 20% down payment of $80,000, that upfront payment equals the amount of equity you’ll have when you first claim homeownership. Every time you pay your mortgage and your principal home loan amount decreases, your home equity amount will increase. So, you’ll owe less on your mortgage and have higher equity the longer you reside in the house.
Equity is just one of the factors you should think about before selling your home. Continue reading to learn about the other essential considerations.
Home prices usually go up over the years, especially when the homeowners maintain the properties well and implement various improvements. They typically appreciate at a 5% per-year rate, which boosts the property’s equity. So, the longer you own your home, the more value or appreciation it will have.
Homeowners often renovate their houses to increase their property value. However, to yield a decent return on investment, you should consider waiting until you complete these projects.
Schools and neighborhoods have a major influence on property values. The quality of local school districts, closeness to local amenities, and opportunities for employment contribute to home values. If your community is building itself up, it may be worth waiting for the upgrades to conclude before selling your house to ensure you can benefit from the improvements by requesting a higher sale price for your property.
A change in finances can lead to major life changes for better and worse. A recent promotion could mean you and your family can upgrade to a bigger house in a nicer neighborhood. A job loss, divorce, or another change in your living situation could mean you can no longer afford your home with your new budget.
Suppose your current home doesn’t have enough space to accommodate your growing family, a new home office, additional belongings, or other life changes. In that case, consider moving to a larger home. Conversely, many older homeowners choose to sell their homes and downsize to a small place if their current residence becomes too much to handle or contains fewer household members.
The longer you own and live in your residence, the less taxes you’ll owe the Internal Revenue Service in most cases. While many home sellers don’t have to report their home sale to the IRS, your financial obligation will depend on how long you live in your house and how much profit you expect to get from the sale. The exception is if you sell your house for a loss.
When determining how long to live in a house before selling it, experts recommend following the five-year rule. The five-year rule for selling a house means home sellers wait at least five years to let the property accrue a decent amount of equity. The rule also allows enough time to deal with the financial aspects of a home sale, such as closing costs and the current real estate market condition.
No rule mandates the need to own a residence for at least five years. Yet the financial implications of the five-year rule are better than those that often accompany a fast homeownership turnaround.
For instance, if you only wait a year to sell your house, you’ll likely lose money on the sale unless you quickly build up enough equity to at least break even or cover the closing costs for the sale. Doing a quick sale on your home will also result in higher capital gains taxes.
Learning about capital gains taxes can affect your decision on how long to live in a house before selling it. These taxes are what you must pay to the IRS when you sell assets for profit. Technically, your house is an asset, but a loophole can minimize how much capital gains taxes you must pay.
If you sell an asset after a year or less of ownership, you’ll pay short-term capital gains on any profits you earn. Long-term capital gains apply to the sale of assets after a year or more of ownership.
The loophole for these taxes refers to the personal exemption you could claim to minimize how much you must pay the IRS. The exemption is $250,000 for individuals and $500,000 for married couples who file joint tax returns. If you make less than $250,000 in profit for the sale of your house as a single person, you won’t have to pay capital gains taxes.
To claim this loophole, you must live in the house for at least two of the last five years.
Sometimes unforeseen circumstances like a mandatory relocation for a better employment opportunity or a family emergency force homeowners to sell their homes before the five-year mark. Though selling your house so soon after purchasing it isn’t ideal, you must consider the possibility of not recouping all your expenses for the purchase.
Fortunately, you can take several steps to ensure you get the best ROI for your home sale. Consider these tips before putting your home on the market:
Now that you know how long it takes to live in a house before selling it, you can better plan your exit strategy from your property. If you have questions regarding your mortgage before selling your home or you’re ready to get a home loan for your new residence, count on our A and N Mortgage experts for help.
As an award-winning mortgage lender with competitive rates and impressive resources, we’ll gladly point you in the right direction—call (312) 961-4380 today for a consultation.
Are you unsure about how long you should own your house before putting it on the market? Here are the answers to common questions on this topic.
If you live in your home for two years, the IRS may let you exempt a $250,000 profit before applying capital gains tax. That’s why knowing how long to live in a house before selling it is important.
You could avoid capital gains by selling your house, immediately buying another one, and investing the home sale profits into the new property.
The amount you’ll give the IRS for your home sale will depend on how long you own the property. You might have to pay short-term capital gains of up to 37% or 0% to 20% for long-term capital gains.
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