Selling a House Before 2 Years: Is There a Tax Penalty?

Jamie Ayers's Photo
By Jamie Ayers Updated January 22, 2024

SHARE

Tax penalty for selling your house before two years | How to avoid capital gains tax | Best way to save when you sell | FAQ

Selling a house before two years of ownership can have some financial implications. You likely won’t recoup the money you invested in the house, and you may have to pay capital gains tax.

This guide will help you understand the financial costs of selling a home early, plus how to save money when you sell.

What happens if you sell your house before 2 years?

While you can legally sell your home the second it becomes yours, there are many reasons why homeowners are urged not to sell their home for at least a few years. Since your home purchase is an investment, unless you’re able to somehow sell it for a much higher price than you bought it for, you’ll lose the money you initially invested in the home.

At the start of a mortgage, almost all your payment goes to interest, so it can take a while to build equity even though your payments remain the same throughout the entire loan term.

When you sell your home, you’ll also be responsible for paying the real estate agents involved in the transaction, traditionally around 6% total between the listing agent and buyer’s agent. This immediately eats away at any equity you’ve built up to this point.

In a best-case scenario, your home will have appreciated in value over the time you’ve lived in it, but that’s not always the case. If your home has depreciated and you don’t have enough equity to make up the difference, you’ll be responsible for paying the remainder of any amount due on your mortgage.

What is the tax penalty for selling your house before two years?

But what if you do sell your home for a profit? The problem is, if you sell your home and you’ve owned it for less than two years, you’ll need to pay capital gains tax on any profit.

Capital gains tax can generally be avoided when selling a home, since sellers can write off up to $250,000 in capital gains tax (or $500,000 for couples), so long as they’ve lived in their home for two years or more.

But if you’re selling before then, you’ll be required to pay capital gains tax. This is taxed at your ordinary tax rate if it’s short-term (held for less than a year) or less if it’s long-term (more than a year, between 0–20%).

What is the best way to save money when selling a home before two years?

If you have to sell your home before two years, it’s important to look for the most affordable method possible. Since you’ll need to pay real estate agent fees, you’ll want to find a reputable, low-cost realtor.

Traditional agents charge 3% for listing fees, but you can find top realtors for less.

For example, Clever can connect you with local agents who charge just 1.5%. These agents provide full service, and they're vetted based on their years of experience, track record of success, and customer ratings.

💰 Offset your tax burden with savings

By selling with a great full-service realtor, you can get top dollar for your home to offset any capital gains taxes. Clever helps you find the best realtors in your local market AND negotiates lower commission rates with them.

With Clever:

  • You'll only pay a 1.5% commission to list your home
  • Sellers save an average $7,000 on realtor fees
  • Offers come in 2.8x faster than the national average
  • Zero commitment — Clever is 100% free

If you're ready to move but want to keep as much cash in your pocket as possible, Clever partner agents help you sell for the best possible price at a discount.

How do you avoid paying when you sell your house?

The simplest way to avoid paying capital gains tax is to hold off on selling and wait until you hit the two-year mark.

If you find you need to relocate for your work, family, or health, there are other options to consider. You could look into renting your home as an Airbnb while you’re away or look for more permanent tenants to rent your home.

By renting your home, you’ll continue to grow your home’s equity, and you won’t have to worry about paying capital gains taxes. Then, once you’ve hit the two-year homeownership mark, you can decide if it’s more beneficial to sell or continue renting the property.

Your real estate agent or accountant can offer better insight to provide you with the most profitable solution.

Are there partial exclusions you can qualify for?

If you absolutely have to sell within the two-year period, it’s important to work with an experienced accountant to see if you qualify for any tax exclusions. These exclusions vary depending on your specific situation.

How much time after selling a house do you have to buy a house to avoid the tax penalty?

There’s no requirement to ever buy another home in order to avoid capital gains taxes when selling your primary residential house. If you sell after two years, you won’t pay capital gains taxes on profits less than $250,000 (or $500,000 for jointly owned homes). There’s no additional requirement to purchase a new home.

Can you sell your house and reinvest in another house and not pay taxes?

If you’re not an investor, there’s no way to avoid capital gains taxes if you sell your home after owning it for less than two years.

If you’re an investor, however, you can avoid paying capital gains with a 1031 exchange. A 1031 exchange allows investors who recently sold a property to purchase a like-property within 180 days of the original property sale.

In order to qualify, investors must find another rental property and close on it within this 180-day window, otherwise they’ll find themselves subject to capital gains tax.

Have more questions? Your best bet is to work with a local realtor who has extensive experience buying and selling investment properties.

» MORE: Find top real estate agents in your market

What is the difference between short-term capital gains and long-term capital gains?

Capital gains can be broken down into short-term and long-term capital gains. If you own your home for a year or less, you’ll be taxed at the short-term capital gains tax rate, which is the same as your income tax rate. If you own your home for over a year, you’ll be taxed at the long-term or maximum capital gains tax rate of 20%.

Top FAQ about tax penalties when selling your home

Do you have to own a home for 5 years to avoid capital gains?

No. Under federal law, you can typically avoid capital gains tax when selling your home if you owned and lived in the house for at least two of the past five years. However, if your profit exceeds $250,000 (if you're single) or $500,000 (if you're married and file a joint tax return), you may have to pay capital gains tax on a portion of your proceeds.

How much is capital gains tax on the sale of a home?

If you owe capital gains tax on the sale of your home, your tax rate will depend on your household income and length of ownership. Selling a house after less than a year could make you liable for short-term capital gains, which are taxed at your ordinary income rate. After a year of ownership, your home selling profits qualify for long-term capital gains, which are taxed at lower rates — 20% or less, depending on your income.

How long do you have to reinvest money from the sale of a house?

If you’re an investor and you’re hoping to avoid capital gains tax by purchasing another investment property, you may qualify for a 1031 exchange. A 1031 exchange allows you to purchase a new property within 180 days from the time of the first property sale. Failure to do so will result in capital gains tax being owed. Read our guide to capital gains taxes on investment properties.

What qualifies as capital gains?

Capital gains refers to the increase in value of an asset from when it was purchased to when it was sold. In real estate, this refers to the value of a property. If a property was purchased for $150,000 and is sold for $210,000, the property gains is the difference between the sold and purchased price, or $60,000. This is the amount that is taxed if capital gains tax is owed.

Can I have two primary residences to avoid capital gains tax?

Even if there are two homes you reside in equally throughout the year, legally, only one can be your primary residence. While you can avoid paying capital gains tax on your primary residence if sold after two years (and under the profit threshold), you cannot do so for your secondary residence unless it was your primary residence for two of the last five years.

However, you can only use the capital gains exclusion once every two years, so if you do own two properties that qualify, be sure to time their sales to your benefit. Otherwise, you’ll end up owing capital gains tax.

Related articles

Better real estate agents at a better rate

Enter your zip code to see if Clever has a partner agent in your area
If you don't love your Clever partner agent, you can request to meet with another, or shake hands and go a different direction. We offer this because we're confident you're going to love working with a Clever Partner Agent.