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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 within a year of purchase, HomeLight always encourages you to reach out to your own advisor.
Six months ago you purchased your new home and just finished unpacking. Suddenly, your boss offers you the perfect dream job — in another state! Now you have to repack, sell your house, and move after living there less than a year, facing various financial challenges.
Of course, the biggest question on your mind is: Has the housing market held strong enough to actually see your home appreciate in value so you won’t lose money?
In this post, along with researched data, we’ll share valuable insights from Sherry Wiggs, a top-performing real estate agent from Westchester County, New York. Wiggs is an expert in the industry, working with 70% more single-family homes than the average Yonkers area agent.
Why are homeowners concerned about selling within the first year?
Sometimes life happens, and selling within the first year becomes necessary due to a job relocation, divorce, or a health crisis. Typically, when you purchase a house, selling right away doesn’t give the home a chance to increase in value.
To allow time for appreciation, many homeowners will follow the 5-year rule, which is the tenet that five years is the minimum amount of time most buyers should live in a home before selling it in order to recoup their investment.
With this in mind, many homeowners will rent out the property instead of selling, which we’ll address along with other options later in this story.
According to the National Association of Realtors (NAR), the housing market has seen record-high increases in median existing home prices in the past 18 months compared to previous years. However, the rate of increase has been sliding downward in recent months.
With interest rates increasing, many economists are predicting housing affordability will curtail first-time homebuyers. According to Wiggs, even the active New York market has cooled down since last year. She gives an example of one home seller who bought their home in December 2021 and told Wiggs in July they had to sell.
“Our market is shifting a little bit, right? So we’re not getting 20 showings and 10 offers — crazy, crazy over asking [price] offers,” says Wiggs. “We’re getting less showings. We’re still getting offers, but we’re getting less offers and they’re not as aggressive.”
The strategy Wiggs suggested to her client was to list the home at the same price they originally paid to attract buyers and encourage multiple offers to avoid a potential loss.
“Because we thought if [the price] was too high we would lose buyers, so we’ve been on [the market] for only three days; we have seven showings and an open house, so we’ll see,” explains Wiggs.
When interest rates rise, it’s still possible for properties to experience appreciation. Some of the common ways that a home’s value can increase include:
- Location – popular neighborhoods and school districts
- Supply and demand – a seller’s market where demand is high
- Comparable properties nearby – known as real estate comps
- Size and usable space of your home – total square footage
- Age and condition of your home – avoiding deferred maintenance
- Upgrades and updates – remodeled kitchen or bathrooms
- Health of the economy – low interest rates and unemployment
- Desired amenities – swimming pools and solar panels
Wiggs has also seen how the power of appreciation can work to a home seller’s advantage. One of her clients bought a home in June of 2021, and the property was originally listed at $1,050,000. Her buyer bid $1,200,000, paying $150,000 over the asking price to get it. In March of 2022, the client told Wiggs they had to sell due to a relocation.
“So, because we’re in such an aggressive market, we put it on [the market] at $1,275,000, in hopes that she’d be able to get out — you know, not having to lose any money on commissions — hoping they’d walk away with a little bit. Fortunately for her, we have an aggressive market, and it went over asking [price] again, and she got $1,371,000.”
According to CoreLogic, home prices increased year-over-year by 20.2% from May 2021 to May 2022. Due to rising interest rates, their forecast is predicting only a 5% year-over-year home price increase from May 2022 through May 2023. The consumer data company is projecting that buyers will be motivated by a slowdown in home price increases and the opportunity of fewer bidding wars.
How much is my home worth now?
Whether you have been in your house for six months or six years, the value is constantly changing due to a variety of factors. It’s important to know your home’s worth to make an informed decision about selling it.
To get an initial free estimate, HomeLight’s Home Value Estimator is a convenient tool that will ask you seven questions about your property and its condition. A top real estate agent can also provide a comparative market analysis of your home’s value, or help you schedule a pre-listing appraisal of your home for more detailed information.
Can I sell my house after owning it for less than a year?
Yes, once you are the legal owner of your home, you could sell it after owning it one day. However, in many cases, this can be a costly decision due to the limited amount of time you’ve owned the property. You’ll likely face a number of out-of-pocket expenses, such as:
- Capital gains taxes – potentially short and/or long-term (see more details below)
- Closing costs that add up – such as HOA fees, property and transfer taxes, title insurance
- Cost of mortgage interest – a strategy to help make financing more affordable for buyers
- Moving costs you may not have planned for – truck, supplies, pizza for your friends
- Renovation Costs – paint, flooring, and landscaping to spruce up your house
- Real Estate Commissions – the fees can vary and are sometimes negotiable
What if I’m unable to sell my home after less than a year?
Selling on the open market isn’t the only option when you need to move quickly. You may find other alternatives that are a better fit for your situation, such as:
- Rent out your home: You might need to sell but don’t have enough equity or money to pay the seller’s fees in order to complete the transaction. If you live in a strong rental market, it may work out better to rent out your house until your home appreciates more. However, Wiggs recommends that checking with your bank to see if you’re able to rent out your property is a good idea as they usually base your loan on being owner-occupied.
- Hold onto the property a little longer: Perhaps you’re in a position where you don’t financially need to sell your home and decide to keep it as an investment or a second home.
- Vacation rental: Depending on where your home is located, renting your home as a vacation rental may be a way to delay needing to sell it immediately.
- Request a cash offer: You can skip repairs and preparations and request an all-cash offer from a home-buying service such as HomeLight’s Simple Sale platform. Tell us a few details about your home, and in as few as 48 hours, we’ll provide a no-obligation all-cash offer. Simple Sale sellers have the ability to close in as little as 10 days. The Simple Sale platform will also show you what you might get for your home selling with a top agent, instead.
- Partner with a top agent who can get you top dollar: Finding the right real estate agent who knows how to set an effective pricing strategy to help get optimal results can make the selling process easier. HomeLight’s free Agent Match platform can connect you with a top-performing agent in your market.
Ultimately, you need to determine your estimated net proceeds and weigh them against the cost of selling your home. If it doesn’t balance in your favor, you must decide if you’re willing to take a loss, or if you can wait to sell your home.
How much does it cost to sell my home?
Selling a home in less than a year can be expensive because you are essentially repeating the process when you originally bought the home, but possibly without much appreciation in value. This includes paying all the fees associated with commissions, closing, and related transaction costs. This is why time is usually needed to help balance out these expenses.
The typical costs for selling a median price home in the U.S can add up quickly and include:
- Staging and house prep fees (varies)
- Realtor commissions for the sale (5% to 6%)
- Inspection and repair fees (varies)
- Closing fees to sell, including title, recording, and escrow fees, transfer taxes, and prorated property taxes (1% to 3% of the sale price)
- Second set of closing costs (if you’re buying a new home)
- Seller concessions (2% to 6% to financially help the buyer)
- Overlap costs (1% to 2% to pay for two houses at the same time)
- Moving and relocation costs (varies and usually based on distance)
- Mortgage payoff (varies)
Closing costs vary, depending on both the regulations of your state and your particular financial situation. Using data from mortgage technology company ClosingCorp, Business Insider reports that the average closing costs required to buy a home in the U.S. in 2021 were $6,905 including transfer taxes, and around $3,860 excluding transfer taxes. Some locations have much higher closing costs, such as Delaware, New York, and the District of Columbia.
Remember to factor in capital gains taxes
A home is typically considered a capital asset by the IRS, and can be subject to taxes when you own it for a short period of time and it appreciates. Determining the taxes you owe can be complex and it’s often recommended to seek out the advice of a seasoned tax professional. However, for the most part, it usually depends on the exact amount of time you own the property, such as in the following scenarios:
When you own your home for less than one year
If you are selling your home after owning it for less than a year, you’ll likely have to pay a short-term capital gains tax on the amount you gain in profit from the proceeds. This tax is assessed on assets held for a year or less and taxed as ordinary income based on your tax bracket.
For example, in 2022, there are currently seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. If your household falls into the 24% tax bracket, and you make $50,000 on the sale of your home, you could be required to pay a short-term capital gains tax of $12,000.
2022 short-term capital gains tax brackets
|Tax Bracket||Filing Single||Married Filing Jointly||Head of Household|
|10%||$0 to $10,275||$0 to $20,550||$0 to $14,650|
|12%||$10,276 to $41,775||$20,551 to $83,550||$14,651 to $55,900|
|22%||$41,776 to $89,075||$83,551 to $178,150||$55,901 to $89,050|
|24%||$89,076 to $170,050||$178,151 to $340,100||$89,051 to $170,050|
|32%||$170,051 to $215,950||$340,101 to $431,900||$170,051 to $215,950|
|35%||$215,951 to $539,900||$431,901 to $647,850||$215,951 to $539,900|
|37%||$539,901 or higher||$647,851 or higher||$539,901 or higher|
When you own your home for more than a year, but less than two years
Any profits from the sale of your home in this situation will typically be taxed at the lower long-term rate — either 0%, 15%, or 20%, based on your capital gains tax bracket.
2022 long-term capital gains tax brackets
|Tax Bracket||Filing Single||Married Filing Jointly||Head of Household|
|10%||$0 to $41,675||$0 to $83,850||$0 to $55,800|
|15%||$40,676 to $459,750||$83,351 to $517,200||$55,801 to $488,500|
|20%||$459,751 or higher||$517,201or higher||$488,501 or higher|
The IRS does offer various capital gains tax exemptions, however, the exclusions typically don’t apply when you sell your home after owning it less than two years.
When you own your home for more than two years
If you have owned the home for more than two years, in the majority of cases, the IRS offers an exclusion if you meet the following criteria:
- Length of time: Typically, you need to have lived in the home you are selling for a minimum of two years out of the five years prior to the sale. This two-year time frame doesn’t have to be continuous or be the last 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 and are a single individual, then $250,000 of profit is typically considered tax-free. Any profit exceeding this amount is generally reported as a capital gain and taxes would be charged accordingly.
- Tax Filing status: If you are married and filing a joint tax return then the amount exempted increases to $500,000 and usually is considered to be 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 (you lived in it for two of the five years leading up to the sale, and you did not already claim an exclusion on another home in the last two years).
Please note: If you don’t meet all of these requirements for the exemptions listed above, the IRS has special rules that may allow you to claim a full or partial exclusion. Consult with a tax professional when selling your home, especially if you have owned your property for less than one year, to determine if other exclusions apply to your specific situation.
I would tell sellers when we’re selling in a short period of time, if there’s anything you can do, you should do it because you’re going to want to show why it’s worth more.
- Sherry Wiggs Real Estate AgentCloseSherry Wiggs Real Estate Agent at Houlihan Lawrence
- Years of Experience 19
- Transactions 586
- Average Price Point $568k
- Single Family Homes 352
Conclusion: Have a plan to increase your home’s value
If you find it necessary to sell your house in less than a year, that doesn’t mean you’ll necessarily lose money, but according to Wiggs, you’ll want to have a plan to increase its value, such as doing some landscaping or painting.
“I would tell sellers when we’re selling in a short period of time, if there’s anything you can do, you should do it because you’re going to want to show why it’s worth more.”
Showing buyers why a property has increased could help offset commissions and taxes according to Wiggs.
Key takeaways for selling your home within a year of purchase
Remember the 5-year rule: Generally, it takes this amount of time to recoup your investment
Appreciation can offset costs: Getting an estimate, CMA, or appraisal can be helpful
Selling can be expensive: Closing costs can include fees, commissions, and insurance
Other options if you can’t sell: Rent out your home (ask your lender) or keep it as a second home
Capital gain taxes can occur: If the property appreciates and you own it less than two years
Lastly, when you have limited time and need a plan for your home sale, HomeLight’s free Agent Match platform can connect you with a top-performing agent in your market who can determine the right strategy for you!
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