When Indianapolis resident Tim bought his first house in 2018, he imagined living there for several years. He was familiar with the neighborhood, chose a mortgage he could afford, and had plenty of friends nearby. But once he moved in, things changed.
Tim, who asks to go only by his first name for this story, discovered that his next door neighbors had a dog who loved to bark outside at 5 a.m. When the AC was running, the unusually loud noise that came from the vents in his house often disrupted his sleep. When the pandemic struck and he began working from home, the frequent noise issues became harder to ignore. And there was no room to set up a productive workspace.
So in May 2020, less than two years after buying the home, he put it on the market. "The decision itself wasn't financial, despite it impacting me financially in major ways," he said. Ultimately, Tim says, his comfort and well-being, and the need for a change, won out over conventional wisdom.
A traditional real estate rule is to wait at least five years before selling a house, but sometimes circumstances arise that can change your plans. Read on for what experts say you should be aware of when it comes to selling sooner rather than later.
If you sell your home less than two years after you bought it and earn a profit, you'll have to pay capital gains taxes. If you own the house for less than a year, you'll have to pay short-term capital gains tax, and if you own it for between one to two years, you'll pay long-term capital gains taxes.
The exact tax rates depend on your income and tax status. The short-term capital gains tax rate is between 10% and 37%, while the long-term capital gains tax rate ranges from 0% to 20%.
Decades ago, homeowners could avoid paying capital gains tax by putting the entire profit toward the down payment on the new mortgage. However, that changed in the 1990s, after the passage of The Taxpayer Relief Act of 1997.
You can reduce the amount you owe on capital gains by calculating how much you've spent on home improvements and deducting it from the profit. For example, if you spent $5,000 on a new fence, you may be able to deduct $5,000 from the profit.
If you don't make a profit on the home sale, you won't have to worry about paying extra taxes, but you may have to pay the difference between the mortgage and how much you sold the house for.
Tim's home sold for $215,000, about $35,000 more than what he paid for it, but he only kept about half of the profit.
Sellers should generally try to earn at least 10% on top of what they paid to break even, according to mortgage advisor Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage." This accounts for expenses like escrow fees, title insurance, lender fees, and county and city transfer taxes.
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When you sell a home, you also have to pay real estate commissions for both the buyer's and seller's real estate agent. This equals between 5% and 6% of the total cost.
Tim paid $180,000 for his mortgage, so he needed to earn about $198,000 to break even. But it's often difficult to receive 10% more on your home if you bought it recently. The average home appreciates between 3% and 5% per year, according to Zillow.
Though Tim's decision worked out for him, "I would say he got extremely lucky with the sale of his home," says Mindy Jensen, real estate investor and host of the "BiggerPockets Money Podcast." "Two years isn't a very long time to see much appreciation."
It can be difficult to turn a profit on a house within a few months or years, as Jensen notes. So if you're considering selling your house, talk to some local real estate agents first about what you could potentially earn.
Review your budget and timetable and how the housing market is doing in your area. If you run the numbers and find that the benefits of selling outweigh any possible attendant risks or costs, proceed with help from a real estate professional that you trust.
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Indianapolis real estate agent Mark Branch of Branch Group Realty said he's not surprised that Tim made a profit on his home or that he found it worthwhile to sell so soon.
"I have had many people sell their home within a year or two of buying it because they had a life circumstance change, such as marriage or job change, and for the most part all have been able to break even or make a modest gain," Branch said. "It's not recommended, but if you bought a home in good condition in a desirable area, you should do just fine."
Zina Kumok is a freelance writer and editor. She has written for outlets such as Investopedia, Credit Karma, and LearnVest. Her expertise has been featured in Glamour, BBC, and NerdWallet. She paid off $28,000 in student loans in three years and works as a money coach at ConsciousCoins.com.
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