Updated July 1st, 2019
There are many reasons people sell their house.
For some, it’s part of their “five-year plan” to purchase a house, live in it until they outgrow it, and move on to bigger and better houses. For others, it’s part of a retirement plan to fix it up and sell it immediately. Still, others have to sell for an unexpected reason and move on.
Whatever your reason, there is an ideal length of time to live in your house before selling. Whether you’re a first-time home buyer or you’ve owned different homes for decades, the right advice can help you build home equity before buying a new house.
Talk to an with the know how to help decide when is the best time to sell your home.
How can I avoid capital gains taxes?
Most people talk about avoiding taxes behind closed doors or on gimmicky sites.
If you want to avoid capital gains taxes on your property legitimately, you must live in your house at least two of the last five years.
There are many people who use this rule to their benefit.
Flippers will find an undervalued first home for a great price and fix it as they live in it. They’ll relay carpet, tear down walls to open up the main floor, and update the kitchen. They’re in no rush, and because they have instant equity in the house, they have money to work with.
At the end of two years, they’ll list the home for sale and boom! They’ve made money off of it without paying capital gains taxes before moving into their next home.
Why would you want to keep your home?
Taxes aside, there are other reasons you may want to stay in your house for longer than a few years, even if it’s a starter home. One of those reasons is the housing market.
How often do you jump on a house at the market’s low and then you’re ready to sell at the peak? If you’re anything like the general public, you jump in on the buying wagon midway up the housing peak.
Then, when two years comes around, the real estate market is declining and you dread listing your home for sale knowing you won’t make much money. By watching the market for the peaks and valleys, you’ll know when the right time to buy and sell is. Most people say it turns around about every seven years.
That means you should stay in your house for about seven years until you sell for a chance at a greater return on investment (ROI).
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How does my mortgage payment affect my equity?
Your mortgage payment should play into the equation when you are thinking about selling. When home buying or selling, you also need to pay attention to mortgage interest rates and whether it’s a seller’s market or a buyer’s market. If you time it right, you can get a favorable mortgage rate with a low monthly payment.
The first few years of owning your house will probably be spent paying toward your interest, not toward the principal.
When you sell your home, you want to make sure you have as much equity as you can have. That means you’ll want to pay as much of it off as you can.
If you bought at a higher interest rate due to subpar credit, you may even want to pay a little more toward the payments each month to make sure you really get your money’s worth out of it.
You’ll also want to watch closing costs. When you sell your house and go to buy another, you are promising more closing costs that must be funded.
Most of the time, closing costs are 2% to 5% of the purchase price of the home. That means if you buy a $240,000 home, you can expect to pay between $4,800 and $12,000 in closing costs to complete the sale.
If you’ve only lived in your home for a short timeframe and you have maybe $10,000 worth of equity in it, you’ll pay that just in closing costs.
How long should you live in a house before selling?
The long and short of it is this: live in your home for at least two years to avoid paying capital gains tax on your home.
If you want equity in your home without major updates, you’ll probably want to live in it between five and seven years.
While this is a good benchmark to keep in mind, keep an eye on the market in your area to make sure you sell at a time where you’ll make the most money out of the sale.
And last but not least, make sure you calculate the amount of money you’ve paid toward the house.
You want to add up the money you’ve paid in your mortgage toward your house, and the money you put down on your house in closing costs and a down payment. You don’t want to break even or end up right back at the beginning when purchasing a new home.
Selling your home soon? You don’t have to pay an arm and a leg to get the best real estate agent. At Clever, we work with the top local agents for much less than traditional commission, just $3,000 or 1% of the listing price of your home to save you money and get you a full-service experience.
How long should you live in a house before selling?
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FAQs About Living in a House Before Selling
How long do you have to live in a house before selling it?
Many experts quote the “five-year rule,” which states that you should stay in the same location for at least five years before buying a new home, so you build up enough equity to make it worthwhile. Because of commission costs and the high interest rates on mortgages, you likely won’t get your home’s value until at least this point.
Can I buy a house before selling my old one?
If you have the funds on hand, you can easily buy a new home before selling your old one. However, you may run into issues qualifying for two mortgages simultaneously, especially if the home value of the new home is higher. You can also take out a short-term bridge loan to make up the difference or use the equity in your home for a down payment (an HEL or HELOC).
Is it bad to sell a house after one year?
It’s neither bad nor good to sell your home after one year, but it’s usually for a good reason. Whether you have buyer’s remorse, a tragedy, or a job change, you’ll have to deal with a lack of built up equity in most situations. If you make a profit, you must pay capital gains tax, short-term if you’ve owned under a year or long-term if it’s been at least one year.
How long do you have to buy another house to avoid capital gains?
To avoid capital gains tax, a home seller needs to have lived in their primary residence for at least two of the last five years. That means if you’ve lived there consistently for two years, you’re exempt from capital gains tax up to $250,000 (or $500,000 for a married couple filing jointly).