DISCLAIMER: As a friendly reminder, this blog post is meant to be used for educational purposes only, not for professional tax advice. If you need assistance navigating the tax implications of selling a house after owning it for one year, HomeLight always encourages you to reach out to your own advisor.
Unforeseen circumstances can precipitate a move sooner than expected. The most common reason for selling a house after one year is job relocation, according to Brad Gore, a top agent who works with 74% more single-family homes than the average Branson, Missouri, agent. Other reasons can include:
- A health issue
- A family emergency
- A financial crisis
- A change in circumstance, such as a divorce or death in the family
- Buyer’s remorse – when the house just isn’t right for you
Unexpected situations signaling the need to move within a year of purchasing a home can prompt questions: “Has my home appreciated enough that I will make a profit … or break even?” or “Can I sell a home after owning it for one year?”
You can sell a home whenever you want, but expect financial consequences if you have little equity in it. Don’t forget all the fees associated with selling a house – and the potential for owing capital gains tax.
These are all considerations that form the basis of the proverbial “5-year rule” for selling a house.
What is the 5-Year Rule for selling a house?
The 5-year rule is pretty self-explanatory. Generally, the longer you keep your house, the more likely you are to make a profit when you sell it. Those who sell their property before owning it five years risk losing money on their investment.
There are a number of reasons for this, including lack of equity accumulated in the home and insufficient appreciation – an increase in property value.
Appreciation derives from a variety of factors, some of the most common of which include:
- Location: Some parts of the country are more attractive to homeowners. Cities offer many amenities – although some buyers prefer a quieter, more rural setting. Nevertheless, proximity to employers, restaurants, shopping, and other attractions can enhance a community’s value … as well as that of your home. Being adjacent to parks and green spaces can add 8%-20% higher value. Low crime rates and good schools can add value. Some HOAs can, as well.
- Supply and demand: Inventory is at an all-time low, resulting in prices rising about 20% in just one year. Low interest rates and changes in work habits (with the rise of remote work due, in part, to the pandemic) contributed to the seller’s market (according to a HomeLight Q1 2022 survey) we’ve been experiencing. There are signs that the market is now cooling as interest rates are on the rise. All this impacts appreciation of existing homes.
- Comparable properties nearby: Known as real estate comps, recent nearby home sales affect the sale price and value of your home. In a seller’s market, prices typically rise, which could effectively boost equity in your home and increase appreciation.
- Size and usable space of your home: Numbers don’t lie, but they may not tell the whole story, either. If you have built a home addition or finished an attic or basement, that’s more usable square footage that can make your home worth more. Accessory Dwelling Units (ADUs) such as a detached mother-in-law house have been known to add as much as 38% value.
- Age and condition of your home: An appraisal provides a good assessment of your home’s general condition. Age does not necessarily detract from your home’s worth, as long as quality materials and building practices were used and the home has been renovated or at least properly maintained. Gore advises homeowners to keep their homes in good condition. “Fix things. Don’t give buyers a reason to chip away at your asking price.”
- Upgrades and updates: Even though homes are built to last, changing trends can necessitate a remodel. Kitchens and baths remain the most popular rooms to upgrade – as well as the most expensive. Just be careful not to over-improve. If you know you’re going to be in the house only a short time, Gore recommends not doing major remodels. Smaller modifications such as fresh paint can add as much as 5% to a home’s value and allow you to keep cash in hand for your move.
- Health of the economy: With inflation comes rising home prices. Conversely, prices typically drop during a recession.
The latest average appreciation rate in the U.S. is currently around 15.7%, according to the National Association of Realtors. That’s up from a rate of 14.3% a year ago. In comparison, it was only 4% in 2019.
How can I find out what my home might be worth now?
No matter how long you have lived in your home, it’s important to know what the property is worth in order to make wise decisions about selling.
Find out what your home might be worth by using HomeLight’s Home Value Estimator. This free tool uses your property information and local housing market data to deliver a preliminary home value. It’s a great starting point to get a ballpark estimate of your home’s worth, but for a detailed evaluation, we recommend getting a full comparative market analysis from a top real estate agent.
Contact an experienced agent to put together a comparative market analysis. They compare your home’s features, size, location, age, condition, and other details with those of similar properties in your area that have recently sold. This provides a timely snapshot of your home’s market value.
You could also contact a professional appraiser to get a more accurate valuation. An experienced, licensed, and certified appraiser performs an even more in-depth assessment of your home against verified recent home sales to really pinpoint its current value.
Can I sell my house after one year?
You can sell your house after one year. But, should you? Some very real personal or financial issues may be pushing you toward a sale. Just be prepared for potential drawbacks.
Drawbacks for selling a home early
You may find a significant downside of selling your home such a short time after purchasing it. “You’ll probably lose money,” Gore speculates. “At best, you might break even. Like any investment, you don’t get profit if you hold it a short time.”
Here are some of the common concerns you may face:
- Cost of mortgage interest: At the beginning of your loan, a bigger percentage of your mortgage payment goes toward interest. Therefore, you’re not accumulating much equity in the home if you sell too soon.
- Closing costs that add up: You paid these when you closed on this home, but you’ll probably have to pay them again if you sell it and buy another home. Expect them to run 1% to 1.5% of the loan amount.
- Moving costs you may not have planned for: Moving costs for a local move average $1,250. A long-distance move (of 1,000 miles) averages $4,890.
- Capital gains taxes: While you can often avoid paying this on the sale of a primary residence by claiming the capital gains tax exclusion, you may not meet the conditions set by the IRS if you live in the home less than two years. We’ll explore this in more detail below.
Options for if you’re facing a need to sell a home early
If you decide that selling your home doesn’t make financial sense after only one year, but you still need to move, there are other options you can explore.
- Rent out the home: If you need to sell but haven’t built up enough equity to cover all the drawback fees, one option might be to rent out your home and let it continue to appreciate. Be aware of hidden costs with this option, such as insurance and perhaps hiring a management company. Of course, there also may be some tax breaks, too. In a tourist market like Branson, Gore says, “You have the opportunity to rent it nightly, as an executive rental, or long-term. It’s not a bad way to go. You can build equity and lower your tax burden.”
- List your home as a vacation rental: Listing your home on vacation rental sites like Vrbo or Airbnb could produce some income until you’re ready to sell.
- Hold on to it: Try waiting out the market if prices are low – or, hold on to it until you return. Some of Gore’s clients keep their homes with the intention of retiring in them, or they may use them as a family vacation home.
- Choose a short sale: If you’re behind on your mortgage payments or owe more than the home’s current value, you may want to think about a short sale as a way to avoid foreclosure. It’s not an easy way out; there are many steps to take, and your credit rating will take a hit, but it’s a way out for some. It’s not something Gore ever recommends, though. “It’s never worth it. The penalty is much higher than people realize.”
- Consider foreclosure: When all other options have been exhausted and you’re still in dire straits, foreclosure might be the only way out.
- Auction: If your home is paid off and the market is peaking, Gore believes auctioning it off “is not a bad way to go.” Just be sure to set a reserve price. If bids don’t meet it, he points out that you can always list it with an agent.
- Use a top agent to price it right: Pricing your home to sell may reduce the number of days on market (DOM) and allow you to cut your losses. You’ll need a knowledgeable agent familiar with your market to help guide you.
Keep in mind that selling your home at a loss can still incur tax obligations. In most cases, canceled – or forgiven – debt is considered taxable income. That can include a short sale, foreclosure, deed in lieu of foreclosure, or loan modification. Gore recommends forming a team, consisting of a real estate agent, your mortgage broker, and a CPA. “Tax issues are complicated,” he acknowledges. “It’s worth the cost.”
Only you can navigate the determining factors regarding whether you should sell your house after one year or come up with an alternate solution.
What happens if I sell my house after less than a year?
If your home has experienced significant appreciation, it’s possible to break even if you sell within a year of purchase. However, it’s more likely that you’ll have a loss.
“It’s not uncommon to sell after one year,” Gore says. In fact, the amount of time people keep their homes is contracting, with the average now at just seven years.
By selling after a year or less, you’re liable to incur expenses such as closing costs, moving costs, and capital gains. If you’re paying for the home with a typical mortgage, you will not have accrued much, if any, equity in that timeframe. You can check to see where you might stand with this amortization schedule.
How much does it cost to sell my home?
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 accrue when moving.
Prep, staging, closing costs, inspections, real estate commissions, and other fees associated with selling your home add up. Expect to pay 9%-10% of the sale price.
A breakdown of the typical costs associated with selling can look like this:
- Staging and house prep fees (1%-4% of the sale price)
- The standard 5%-6% Realtor® commission fee for the sale
- Inspection and repair fees (varies)
- Closing fees to sell, which include title fees, transfer taxes, escrow fees, recording fees, and prorated property taxes (1%-3% of the sale price)
- A possible second set of closing costs if buying a new home
- Seller concessions (2%-6%)
- Overlap costs (1%-2%)
- Moving and relocation costs (varies)
- Mortgage payoff (varies)
To get a better idea of what you’ll have to pay at closing, turn to HomeLight’s Closing Costs Calculator. Plug in your information to get a free estimate of the fees you might incur when selling your home.
Gore works with an investor client who often buys homes at auction, which he fixes up and sells the following year. That allows him to bypass many of the typical transaction fees, reducing his costs to 1%-2% of the purchase price. For a $200,000 house, Gore’s client pays about $2,500 in fees. “Buying a short sale or foreclosure results in few fees,” Gore recaps, “but when you sell, there’s a significant jump in the fees you pay.”
For his client, those fees – including real estate agent commission, taxes, closing costs, and possibly more – total up to roughly 10%, or $20,000. That’s on top of the cost to fix up the properties.
Remember to factor in capital gains taxes
Your home is a capital asset in the eyes of the IRS. Therefore, when you sell it, the net profit is typically taxed. Calculating your tax debt is complicated – and becomes even more so if you sell a home after just one year, due to short-term capital gains tax.
Long-term capital gains tax
Under the capital gains tax exclusion, in the sale of a primary residence, the first $250,000 of profits (or $500,000 for a married couple filing jointly) is typically not taxed if you live in your home for at least two of the five years prior to the sale.
Any profit over and above that threshold is subject to taxation. While it’s unlikely that your home will have appreciated in value enough in a year or less to produce that kind of profit, you still may be required to pay taxes on the sale.
- Length of time: You must have used the home you are selling as your principal residence for at least two of the five years prior to the date of sale. The two-year requirement doesn’t have to be continuous. It also does not have to be the two years immediately preceding the sale.
- Amount of the gain: If you owned and lived in the home for two of the past five years before the sale, then up to $250,000 of profit is typically considered tax-free. If your profit exceeds the $250,000 (or $500,000 for married, filing jointly) limit, the excess generally must be reported as a capital gain and taxes must be paid.
- Filing status: If you are single, the threshold is $250,000. If you are married and file a joint return, then up to $500,000 of profit is typically tax-free.
- Primary residence requirement: The law lets you exclude the profit from your taxable income as long as the home was your primary residence (lived in it for two of the five years leading up to the sale, and you haven’t claimed the exclusion on another home in the last two years.)
Short-term capital gains tax
If you are selling a home less than a year after you purchased it, it might cost you because the short-term capital gains tax is charged against you as normal income, as determined by your tax bracket.
For example, in 2022 there are seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. If your household falls into the 15% bracket, and you made $75,000 on the sale of your home, you might be required to pay a short-term capital gains tax of $11,250.
If you don’t meet all of the requirements for the exemptions listed above, the IRS has special rules that may allow you to claim a full or partial exclusion – such as job relocation, health changes, or other unexpected circumstances.
Note: Selling a second home, vacation home, or any property that isn’t your primary residence can make you liable for capital gains tax up to 20%. This could come into play if you opt to rent your home before you sell it, although you can take depreciation for a rental.
Consult with a tax professional to examine your options when selling a home, especially if you have only owned it for just one year. “I wouldn’t relocate until I talk to a CPA,” Gore states.
Conclusion: Stay or go
Most of the time, it makes more sense financially to stay in your home for a few years. However, life sometimes gets in the way and you have to move sooner than expected.
That’s why it’s important to have a plan when you purchase a home regarding how long you expect to live on the property. If you’re currently facing a sale for relocation, before you purchase another home, ask yourself where you want to be in five or 10 years.
For most of us who are not real estate investors, the 5-year rule is still a good guide to help get the most out of a home when it comes time to sell. Of course, there are opportunities to achieve a good return on your home sale after owning a property for just one year.
Use HomeLight’s Agent Match to find a top agent to help strategize your next steps. No matter how long you’ve lived in your home, our data shows that the top 5% of real estate agents in the U.S. sell homes for as much as 10% more than the average agent.
Header Image Source: (Євгенія Височина / Unsplash)
- "Topic No. 409 Capital Gains and Losses," Internal Revenue Service (June 2019)
- "First Quarter of 2022 Brings Double-Digit Price Appreciation for 70% of Metros," National Association of Realtors (May 2022)
- "2022 Home Buyers and Sellers Generational Trends Report," National Association of Realtors, Lawrence Yun et al. (March 2022)
- "Green Cities: Good Health," University of Washington (June 2010)