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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 two years, HomeLight always encourages you to reach out to your own advisor.
People are staying in their homes for shorter periods of time these days. The average length of home ownership has shrunk to just seven years, according to Brad Gore, a top agent who works with 74% more single-family homes than the average Branson, Missouri, agent.
Nevertheless, most people don’t plan on selling after only two years. It’s not an ideal situation … but it may be necessary.
Before you sell, there are some things to consider.
1. What’s your reason for selling?
The most common reason for selling a house after two years is job relocation, Gore says. 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
2. Do I have to follow the 5-Year Rule?
The 5-year rule states that 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.
Primary reasons for this include lack of equity accumulated in the home and insufficient appreciation – an increase in property value.
“The market is the largest driver of price,” Gore says. Price is one element in determining how much your home has appreciated. Appreciation derives from other factors as well, some of the most common of which include:
- Location: Some parts of the country are more appealing to homeowners. Cities offer many amenities, although some buyers prefer a quieter 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: With inventory at an all-time low, prices have risen about 20% in just one year – although Gore sees the market beginning to “level off,” meaning it’s “getting back to normal.” Low interest rates and changes in work habits (with an increase in remote work since the beginning of the pandemic) contributed to the seller’s market (according to a HomeLight Q1 2022 survey), but rates are rising as the market resets, impacting appreciation.
- Comparable properties nearby: Real estate comps are recent nearby home sales that 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: If you have built a home addition or finished an attic or basement, that adds more usable square footage that can increase your home’s value. 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 is a tool to evaluate 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 if your home is built to last, changing trends can necessitate a remodel. Kitchens and baths remain the most popular rooms to upgrade. They’re also 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 caution. “Do things to increase the value, but think long-term,” he says, and don’t overdo. Small improvements are best. For example, fresh paint can add as much as 5% to a home’s value.
- 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.
3. Will I lose money if I sell after 2 years?
The bad news is, “you’ll probably lose money,” Gore says. “At best, you might break even. Like any investment, you don’t get profit if you hold it a short time.”
The good news is, at the two-year mark, you may qualify for the capital gains tax exemption.
Your home is a capital asset in the eyes of the IRS. Therefore, when you sell it, the net profit is taxed. However, the federal tax code allows you to claim a Section 121 exclusion if you live in the primary residence at least two of the five years prior to selling. That enables you to exclude $250,000 (individual filers) or $500,000 (joint filers) of profit from your capital gains tax liability.
- 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.)
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. Consult with a tax professional to examine your options when selling a home you have owned for only two years. “I wouldn’t relocate until I talk to a CPA,” Gore states.
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.
4. How can I calculate my potential loss?
These steps can help you find out if you stand to lose money by selling your home after two years:
- Get an estimate of your home’s value. HomeLight’s Home Value Estimator is free and easy to use, and is a great place to start. Just answer a few questions about your property to receive a preliminary value estimate.
- Deduct your outstanding mortgage balance and any costs of selling you incurred (such as real estate commission, closing costs, title fees, repairs, prep, and staging). You can also check HomeLight’s Net Proceeds Calculator. This free tool will provide an estimate of the costs of selling your home and the potential net proceeds you might earn.
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 because the borrower “gains back” the amount they would have had to pay.
Forgiven debt can include a short sale, foreclosure, deed in lieu of foreclosure, or loan modification. If the lender cancels a debt on your primary residence, you may be excluded from any tax obligation. Check with the IRS Interactive Tax Assistant to determine if you have to include canceled debt on your income tax return.
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.”
5. How do I find my home’s value?
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 examines your property information and local housing market data to provide 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 do 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 in order to provide an accurate estimate of your home’s market value.
A professional appraiser can provide an even more accurate valuation. An experienced, licensed, and certified appraiser performs an in-depth assessment of your home against verified recent home sales to pinpoint its current value.
6. What are the costs I might incur when selling my house?
If your home has experienced significant appreciation, it’s possible to break even if you sell within two years of purchase. However, it’s more likely that you’ll have a loss.
When selling your home, you’ve got to consider 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 stand with this amortization schedule.
Here’s a breakdown of some of the costs you may incur:
- 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: 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.
- Early pay-off penalty fee on the mortgage: “Some loans, like an ARM or a jumbo loan, have penalties for paying them off early,” Gore advises.
- 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.
7. 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.
8. What other options do I have besides selling?
If you decide that selling your home doesn’t make financial sense after only two years, 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 fees, one option is 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 in case you return someday. 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.
Conclusion: Can you do it in two?
When selling your home, “everything changes at two years,” Gore says, primarily due to the capital gains tax exemption. Nevertheless, it’s extremely difficult to make a profit on your home in such a short time. That’s why he advises his clients to make a net sheet and consult a CPA.
Gore’s other advice is to build a team consisting of a CPA, your mortgage broker, and a real estate agent. This team can advise you of the best strategy in your situation and your market.
Use HomeLight’s free Agent Match platform 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: (Sidekix Media / Unsplash)
- "Something Has to Give in the Housing Market. Or Does It?," The New York Times (January 2022)
- "Top Agent Insights for New Year 2022," HomeLight (January 2022)
- "First Quarter of 2022 Brings Double-Digit Price Appreciation for 70% of Metros," National Association of Realtors (May 2022)
- "Topic No. 701 Sale of Your Home," Internal Revenue Service (January 2022)
- "Tax Law for Selling Real Estate," TurboTax (May 2022)