It’s a common question: how soon can you sell a house after buying it? The answer is, it depends. This guide will help you understand how to manage expectations with buying and selling a house.
Selling your home soon after buying it can be stressful, especially if you’re unsure of how to go about it and at what potential cost. A typical homeowner spends about 13 years in a home before selling, so putting a home back on the market soon after purchasing may have implications, mainly on cost.
You’ll need to think about things like capital gains taxes and potentially paying any prepayment penalties on your mortgage.
Reasons for having to sell quickly
Purchasing real estate isn’t an investment that will make you rich overnight. The appreciation on a home depends largely on the demand within a region and the amount of available housing inventory.
When homeowners reside in their homes for the median time frame of 13 years, they’re slowly building equity. But sometimes life is unpredictable and due to changes such as job loss, a death, divorce, or retirement, homeowners may need to move.
Related: How Long Does It Take to Sell a House?
What are the costs you need to think about?
If you purchased the home recently, the most important thing to consider is how much money you will lose in the transaction of selling it again.
The amount could be a lot, depending on how much you purchased the home for and how soon you need to move.
There are costs involved with putting your home back on the market such as tax considerations and sunk costs that may occur since the property hasn’t had enough time to appreciate. Most likely it will cut into or negate any equity you have built in the home.
It’s not simply about selling the house for what you paid for it. You’ll need to factor in the costs associated with:
- Buying another home
- Selling your current home
- Equity gained or lost
- Moving expenses
What are capital gains taxes?
Capital gains is the amount you are taxed on the difference between what you pay for an asset such as stocks, bonds, cars, boats, and real estate, and what you sell it for. This is assuming you’d make a profit on selling your house.
It’s the amount you’d otherwise have to pay on the first $250,000 you make on the sale of your home. Couples are taxed on the first $500,000.
The typical amount of capital gains taxes would be around 15 percent of the sale of your home, which could end up being a large chunk of money.
However, if you live in the home for at least two years and it’s your primary residence, you won’t have to pay this amount if you decide to sell. It’s one of the best arguments for not selling your home within the first two years of buying it.
The IRS allows some exemptions to capital gains taxes—related to being forced to move due to natural disasters, unemployment, etc.
Further reading: What Expenses Can You Deduct When Selling a Home?
Here are a few examples of how capital gains taxes work, with some numbers to help you better understand:
Let’s say you bought your house for $250,000 and sold it within 11 months for $300,000. Your gain would be $50,000.
Assume your income is taxed at 20 percent—you’d have to pay 20 percent of that $50,000, which is $10,000.
If you sell after a year but in less than two years, your capital gains tax will be slightly lower, at the long-term rate, which is either 0, 15, or 20 percent. Again, this is based on your capital gains tax bracket.
Mortgage prepayment penalty
If you have a mortgage to pay and you sell your home before a certain amount of time, your lender may charge you a prepayment penalty. Mortgage prepayment penalties are typically 2-5 percent of the balance of your loan.
The reason some lenders may charge a penalty is because they would be missing out on interest payments they would’ve received in the years you would’ve lived in the home.
You’d have to check the clause in your mortgage to see if it applies to you.
The costs involved with selling a house after buying it
The cost of a home is more than mortgage payments. When you first bought the house, you probably paid for a down payment, closing costs, insurance payments, appraisal fees, and taxes, to name a few.
Keep in mind sellers also have closing costs, so you’ll have to pay for these costs all over again. Seller closing costs include agent commissions, which can reach 6% of the total sales price.
Wait until you break even
There’s something known as a breakeven point. This is a timeline that involves selling your home and being able to recoup the money you spent on purchasing the property.
Take a look at how much you paid for:
- Your down payment
- Closing costs
- Mortgage insurance
- HOA fees
- Property taxes
Then determine how much equity you’ve accrued and what the balance of your mortgage is. For many homeowners, it’ll take at least a few years before reaching a break even point.
3 Timeframes for selling and when you’ll lose money
- Six months: If you sell in the first six months, you should expect to lose money in the transaction. If you’re in this situation, consider renting out your house and moving into a temporary apartment. It’ll let you hold on to the property for a little while longer, especially if you don’t want to fork up capital gains tax.
- After one year: In this scenario, you will likely lose money. However, there’s a chance that you could be okay if you happen to live in an area with a strong seller’s market.
- After two years: At this point, you could potentially break even or have a small net proceeds gain, depending on the housing market. The good news is you won’t have to pay capital gains taxes.
Understand the costs and make an informed decision
While it’s generally not a good idea to sell your home soon after purchasing it, sometimes it’s unavoidable because of life circumstances. Understanding what costs you may incur will help you better prepare so can minimize your losses.
If you can put off moving for at least a few years, you’ll avoid paying capital gains tax and could break even before you decide to sell.
See also: How to Get Your House Ready to Sell