What Is the 5-Year Rule for Selling a House? There Are Actually Two
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April Blake Contributing AuthorClose
April Blake Contributing AuthorApril Blake is a freelance writer and editor, located in Cayce, South Carolina. She is a homeowner who appreciates following the real estate market in her area. April also frequently writes about food, health, wellness, and lifestyle topics; and enjoys yoga and ice cream in her free time.
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Richard Haddad Executive EditorClose
Richard Haddad Executive EditorRichard Haddad is the executive editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
You’ve got a house that’s been your primary residence and you’ve lived in it for fewer than five years. But now you need or want to move because your life circumstances have changed. When considering making this move, the two most common questions center on money: Will you make a profit on selling a house so soon after purchasing it? And will you have to pay taxes on any potential profit from selling the house?
The five-year rule, as it’s known in real estate, states that new homeowners generally should live in a home for at least five years before selling the property, otherwise they can be at more risk of losing money on their investment. But there’s more to consider than just years when determining if selling in in fewer than five years is a good move.
This principle happens to overlap with a tax rule that may affect homeowners who are considering selling their homes within five years of purchase. We’ll address the tax implications further down.
The five-year rule is not hard and fast — in fact, some real estate agents don’t even refer to it as such. But there are several factors to consider when selling your house within five years of purchasing it.
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How do I decide if the 5-year rule applies to me?
Allen Studebaker, a top real agent in Scottsdale, Arizona, who works with over 71% more single family homes than the average Phoenix area agent, shares information to help homeowners decide if it’s worth it to make a move from their primary residence in fewer than five years.
When it comes to buying and owning a home, the general advice is that it will gain more value the longer it is owned by the same owner, especially if the area where it’s located is growing or becoming more sought after. This is known as appreciation, and it comes from a variety of factors that influence each other to drive home values upward.
When homeowners need to sell their home quickly, determining whether the sale is worthwhile can be confusing. This is where the five-year rule becomes important.
So what factors should be considered when you’re wondering if your home’s value has appreciated in the time you’ve owned it?
Some common factors that increase a home’s value include:
- Location
- Supply and demand
- Comparable properties nearby (known as real estate comps)
- Size and usable space of your home
- Age and condition of your home
- Upgrades and updates
- Health of the economy
- Generational needs
- Walkability score
“The key thing for people to do is to gain knowledge of their market,” Studebaker says.
A major factor in seeing if the five-year rule applies is the current appreciation rate for homes in your area. The appreciation rate in the United States can vary wildly. In December 2023, the average appreciation rate was 5.9%, while it was only 4.6% in December 2022.
Use HomeLight’s online Home Value Estimator to find a ballpark estimate of your home’s worth right now. This free tool will give you an idea of what your home’s value is in real time, compared to the purchase price, so you can gauge the appreciation.
What if I need to sell my home before five years?
Sometimes the need to relocate fewer than five years after purchasing a home cannot be avoided. Life happens, but there are options other than selling to help you build up enough equity in your home before putting it on the market.
A common option for people who do not yet want to sell their home before owning it for five years is to turn it into a rental property. You can explore renting it out for the long-term or as a short-term vacation rental to delay selling it while still earning income from ownership.
Vacation homes do well in states like Studebaker’s market, which is in a year-round warm part of the country. “Unlike some of the cold weather states, we have a lot of vacation rentals here,” Studebaker says. “So right now in Arizona it’s 65 degrees and sunny, but in the Midwest, it’s snowing, and in the northwest, it’s raining. Those folks are coming here to enjoy our winter weather.”
The other 5-year rule: Tax implications for selling your home
The IRS taxes capital gains from a home sale differently based on whether the property has been owned long-term or short-term. This distinction helps differentiate average homeowners from investors. Average homeowners typically sell their homes to relocate, upsize, or downsize. Investors, on the other hand, frequently buy and sell homes within a year for profit, which is considered taxable income.
Understanding taxes on a home sale can be complex for most people, as the IRS treats your home as a capital asset subject to capital gains tax. This means you may owe taxes on any profit from the sale if your home’s value has increased. However, there are potential capital gains exemptions available, making the five-year rule beneficial for homeowners who adhere to it.
The IRS offers a capital gains tax exclusion, but it depends on how long you owned the home, how long it was your primary residence, your filing status, and the amount of the profits you earned from the sale.
You must have lived in the home as a principal residence for any two of the five years before selling. If that condition is satisfied, up to $250,000 of profit is typically considered tax free if you’re a single filer, or up to $500,000 if you are married and filing jointly. Profits exceeding these thresholds generally must be reported as a capital gain and are subject to taxation. For personalized advice on your specific situation, consult with a tax professional.
In a market where there are fewer homes available for sale — a seller’s market — increased demand can drive sale prices above the list price, potentially resulting in larger profits for homeowners. In a seller’s market, being knowledgeable on the tax implications is more important than ever.
“What we’re looking at is an extreme shortage of inventory,” Studebaker says. “Supply and demand is driving the home prices up significantly, and we don’t see that changing for at least the next three years. It could be as long as five years before we see a change in inventory.”
Testing the 5-year rule: How much does it cost to sell my home?
If you’ve purchased a home within the past five years, you may remember the costs associated with purchasing it, from inspection fees to closing costs. These costs can add up, and will also factor into whether it’s worth it to resell within five years, since most people who sell their home often need to purchase a new one to live in. 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 face when moving.
Your costs will vary depending on the condition of your home, and the availability of homes for sale in the market in which people are buying.
Common costs associated with selling your home include:
- Staging fees and costs to prep the house for showing (varies)
- Realtor commissions for the sale (5% to 6% is standard, but this may change)
- Inspection and repair fees (varies)
- Closing fees to sell, which include title fees, transfer taxes, escrow fees, recording fees, and prorated property taxes (1% to 3% of the sale price)
- A possible second set of closing costs if buying a new home
- Seller concessions (2% to 6%)
- Overlap costs (1% to 2%)
- Moving and relocation costs (varies)
- Mortgage payoff (varies)
One of the things that homeowners need to think about is what your strategy will be on how you’re going to get to the next house. Some people are upsizing, some people are relocating, some people are downsizing. They really need to get with a professional and put together a plan, because with inventory as low as it is, you need to have a strategy on how you’re going to make that next move.
Allen Studebaker Real Estate AgentClose
Allen Studebaker Real Estate Agent at North&CO.
- Years of Experience 21
- Transactions 711
- Average Price Point $601k
- Single Family Homes 578
Beating the 5-year rule: Get experts involved
“One of the things that homeowners need to think about is what your strategy will be on how you’re going to get to the next house,” Studebaker says. “Some people are upsizing, some people are relocating, some people are downsizing. They really need to get with a professional and put together a plan, because with inventory as low as it is, you need to have a strategy on how you’re going to make that next move.”
Consulting your CPA or tax professional is crucial when considering selling your home within five years of purchase. A tax professional familiar with your financial circumstances can provide invaluable insights into whether selling would be advantageous or lead to additional expenses.
It’s important to think about how long you want to live in a house before you make a purchase, because there are many benefits to following the five-year rule. Losing money on a home purchase is never the goal, so make sure it’s the right choice before signing on the dotted line.
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Partner with an experienced agent to truly evaluate the 5-year rule
When it’s time to buy your next home, use HomeLight’s Agent Match tool to find and partner with a top agent. No matter how long you have lived in your home, our data shows that the top 5% of real estate agents across the US sell homes for as much as 10% more than the average agent.
If you are looking to sell your home and relocate, ask yourself where you want to be five or 10 years from now. Ultimately, the five-year rule is a good guide for the average homeowner to help get the most out of where you live now, and will give you the best return when the time comes to sell and move on to your next home.
Header Image Source: (Emily Barrington/ Unsplash)
