There is no set time limit for how long you should wait before selling your house. You can list it as soon as you close the purchase of a new home.
Or, you can wait for several years before selling. It all depends on the market conditions and what you are looking to achieve.
Real estate experts have a 5-year rule. It is recommended that homeowners wait at least five years before selling the house for the real estate transaction to be profitable.
This is because, houses take three to five years to build enough equity to enable you to recoup on your buying and selling costs.
This article will discuss the benefits of waiting at least five years before selling your house, disadvantages of selling too soon, and circumstances under which you can sell sooner.
Whether you bought your house cash or through a mortgage, a gain in equity is what makes the investment worthwhile. In a normal real estate market, the annual home value appreciation is 3-5%. Therefore, the longer you hold the house, the more equity it gains.
In the case of a mortgage, your accrued equity is the difference between value of the house and your mortgage balance. Each mortgage payment increases your equity. The longer you take to sell, the less the mortgage balance and the more your equity.
If you sell your house at a profit in less than two years of buying it, you will be liable for capital gains taxes. However, if you wait for longer, you may qualify for a capital gains tax exclusion.
To qualify for an exclusion, you need to have lived in the house for at least two years. The exclusion is up to $250,000 for individuals and $500,000 for couples.
With that said, you may still qualify for a partial exclusion if you sell sooner than two years in circumstances such as relocation, loss of a job, health issues, death in the family, natural disasters, etc.
The payable capital tax gains rates vary from state to state and depending on the profit margin and your income bracket. It can be as high as 15% in some states. In Colorado, the state government taxes capital gains at the same rate as regular income at 4.55%
In a traditional sale process of a house, closing costs take up 10-15% of the sale price of the house. These include real estate agent commission, closing attorney costs, staging, marketing, listing fees, taxes, escrow fees, etc.
They can be higher if you do major repair or upgrades in the house. Waiting for three to five years enables you to recoup your buying costs.
Some listing sites require you to indicate when you purchased the house. For some prospective buyers, if you bought the house recently and you are already selling it, it may be a red flag.
Although you may be selling for genuine reasons such as needing to relocate for a job, prospective buyers may wonder if the house has major undisclosed issues. As a result, the house may take longer to sell.
Typically, the way mortgages work is that you are given a loan to buy a home. Most lenders require that you make a 20% down payment and they finance the rest. You then payback the loan over an agreed period of time at an interest. The interest is the main way that lenders make money.
If you decide to sell the house too soon, you minimize your interest, which reduces the lender’s return on investment. Therefore, some lenders have a clause in their mortgage contract that imposes a prepayment penalty.
You will need to pay all the mortgage balance and penalties upfront in addition to closing costs for the real estate transaction. Even if you have a cash offer, there are still closing costs involved. If you plan on buying another house immediately after, you will also incur buying costs.
The penalty depends on the terms of your contract. You may either be charged a flat rate or a percentage of your mortgage amount. You will also be required to pay the mortgage interest rate fees and charges on the principal amount upfront.
Below are some scenarios when it would be ok to sell a house in less than three to five years of buying:
Conversely, in a buyers’ market, the housing inventory is quite high. Therefore, the supply is way above the buyer demand.
As a result, the market is quite competitive and the prices may be lower resulting to selling the house at a loss.
According to the National Association of Realtors, homeowners keep a house for 10 years on average before selling. In favorable market conditions, this is enough time for the house to gain significant equity and to enable homeowners to qualify for capital gains tax exclusion.
However, you do not have to wait for 10 years. Real estate agents have a 5-year rule to increase your chances of selling profitably, breaking even on your closing costs, and also qualify for tax emptions.
With that said, some circumstances such as relocating, sickness, and major problems with the house may necessitate that you sell the house sooner.
If so, work with a reputable real estate agent in your area to help you with getting the best value of the house and applying for closing cost and tax exemptions whenever possible. If the house has major issues, consider selling as-is to a cash buyer near you.
If you are in Denver, contact wesellhousesindenver.org to get a cash offer for a quick sale of your house regardless having issues or how long you have owned it.
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