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Buying a home is a big deal — probably the biggest single purchase a person ever makes — and most people hunker down once they’ve done so. U.S. homeowners stay in their residence a median of 13 years, according to studies by Redfin and the National Association of Realtors — a figure that’s been constant since 2019. But some people find it necessary to sell their home after as little as one year or less.
If you find yourself in this situation, either by choice or out of necessity, don’t worry. While the situation is uncommon, it is far from unheard of. Here is everything you need to know about putting your home back on the market after just one year.
Drawbacks of selling a home within a year
Under most circumstances, there are no legal restrictions preventing you from selling your home after owning it for less than a year. In fact, if you wanted to, you could put your home back on the market immediately after closing on it.
That said, you are likely to face some financial challenges in pursuing this route. For instance, if you sell your home for more than you bought it for, you may have to pay capital gains taxes. Depending on how much you make on the sale and how long you’ve actually owned the house, they can be steep. In addition, if you have a mortgage on the property, you will have to repay it in full, incurring some additional charges for doing so. Finally,“if you used a first-time homebuyer program or a grant program, you may have some type of fee that will be owed upon the sale of the property,” notes Amy Cherry Taylor, a Realtor and associate broker at Amy Cherry Taylor & Associates in Fredericksburg, Virginia.
Capital gains and tax implications
Capital gains tax is likely to be the biggest expense you will face when selling your home so soon after purchasing it. Homeowners who’ve been in residence for at least 24 consecutive months get an exemption that often effectively reduces their taxable gains to zero. However, it’s pretty certain that “capital gains tax will be owed if you have not [yet] lived in your primary residence for two years,” says Taylor.
Short-term capital gains, on assets held less than one year, are taxed as ordinary income, at a rate as high as 37 percent. Long-term capital gains, on assets held for more than one year, are taxed at special rates.
To calculate your potential long-term capital gains tax, take the final sale price of the home and subtract the price you purchased it for, along with any selling costs and the cost of any home improvements done during the period that you owned it. In 2023, if your net proceeds are below $44,625 after the sale, you may not have to pay capital gains tax. But if they’re between $44,626–$492,300, you will pay 15 percent on the total gains. And if they’re more than $492,300, expect to pay 20 percent on those gains. “You will want to speak with your tax advisor,” says Taylor.
You’ll also have to consider the taxes at your new home. You may be moving to an area that has higher property taxes, for example, which you will need to account for in your budget.
Mortgage prepayment penalties
If you financed your home purchase, your lender may charge you a prepayment penalty for retiring your mortgage so soon.
“When selling a home after a year or less, a mortgage prepayment penalty [may be] applied of approximately 2 to 5 percent of the loan amount,” says mortgage broker Chris Allard of the Chris Allard Mortgage Team in Ottawa, Canada. “The minimum penalty is 3 months of interest, to a maximum of approximately 5 percent of the total loan amount.”
Taylor notes that most loans don’t contain this penalty. But you’ll want to check your specific mortgage to make sure you aren’t subject to it.
Closing costs and moving expenses
In addition to tax challenges, you’re going to have to go through the sometimes costly process of moving again. The average move costs $1,677, according to HomeAdvisor, and it will be even more if you’re moving long-distance.
Meanwhile, there are also closing costs to consider. Closing costs for sellers vary by state, but in 2021, they averaged just over 1 percent of a home’s sale price, according to data from ClosingCorp. So if you sell your home for $300,000, you can expect to owe a bit over $3,000 in closing costs.
There are some exceptions that may allow you to avoid paying additional fees for selling your home within the first year of ownership. These exemptions include if the sale was due to hardships like job loss, divorce or a death in the household. You may also be able to receive an exception for military service. Be sure to consult with an attorney if you believe you are eligible for one of these exceptions.
Strategies for selling a home after a year
Moving within a year or less of buying a house is obviously not ideal, and avoiding it is best if possible. While this isn’t always an option, consider some of the possibilities that can help you make the best of this difficult scenario.
Try to wait
If you can hold on to the home for at least two years, you can likely avoid paying costly capital gains taxes. Waiting may not seem like an option, but if you are able to rent out all or part of it, the rental income might offset the cost of the mortgage.
Really need to sell? Consider having the home staged. Professional stagers know how to emphasize a house’s best attributes to make it as appealing as possible to buyers — and get you the best price. “Potential buyers will know how long you lived in the home and may see it as a red flag, jumping to the conclusion that something must be wrong with the property,” Allard says. Try to mitigate that by showing off what drew you to the home in the first place.
Alternative selling platforms
If you are in a rush and need to sell fast, consider selling to a cash for homes company. Cash deals close much more quickly than ones that involve financing and lenders. Depending on your location, you may also be able to get an instant online offer from an iBuyer. This route may not net you as much money as a traditional sale, but it will get you that money much faster.
Find a trusted real estate agent
Perhaps the most important part of selling a home after owning it for less than a year is working with an experienced real estate agent who knows how to handle these things. Finding an agent who can navigate the market and work with your tricky circumstances is essential in unique selling situations.
“I have helped a number of clients sell their home in this exact scenario over the last couple of years,” Taylor says. The coronavirus pandemic in particular created new workplace conditions that have upended people’s plans: “We have seen many more people able to do this over the last two years due to market appreciation,” she adds. “There were not many markets prior to the ‘Covid market’ that allowed such quick appreciation.”
Yes, it’s possible to make a profit after selling a house after a year, but it’s difficult. Home values would have to have appreciated considerably in that time frame — and if they have, you’ll likely be subject to a capital gains tax. Also, the profit would have to be enough to recoup not just the sum you spent on the house, but your closing costs, and — if you financed the purchase — any prepayment penalty for retiring your mortgage early.
You might be tempted to sell if the neighborhood has a sudden increase in demand, and listing prices have skyrocketed. Or you got an especially good deal on the house, and you have made significant renovations that have increased its value.
Unless you’re a professional house flipper, though, it’s tricky playing such quick-turnaround games with residential real estate. You can sell your home right after purchase, but usually it would not be a smart financial move to do so: You’ll end up taking major losses. Most people only do it if they have an emergency, significant life changes, or a compelling job offer in another state or town.
The length of time you should stay in a property before selling it depends on how much it appreciates and how much equity you’ve built up in it. Basically, it’s best to wait until you reach the break-even point before selling, meaning you can recoup all the money you spent on purchasing the home (including closing costs, real estate agent fees and mortgage interest.)
There’s no single magic number, but most real estate professionals generally recommend five years as a rule of thumb for staying put.
No. Selling a home early may result in some costs and taxes, but there is no formal or official penalty for doing so — unlike, say, the 10 percent tax penalty you pay if you withdraw funds from an IRA or 401(k) before age 59.5.
But if you sell before you’ve been in a house for a few years, you may be penalized in other ways. For one, any profit you realize is more likely to be subject to capital gains tax. The IRS offers a capital gains tax exemption, which allows you to deduct $250,000 in profits if you are a single filer and $500,000 in profits from the home sale if you are a joint filer. But that’s only if you’ve lived in the home for at least two of the past five years.
It’s also less likely that you’ll recoup the various expenses associated with buying the house — the closing costs, administrative fees, moving costs and mortgage interest (you’re primarily paying back interest in the first few years of your mortgage term, remember).
Finally, selling your house soon may also lower the perception of your property among potential buyers: What’s wrong with the place, they may wonder, that these folks are decamping so quickly?
It’s not so much a tax penalty as the loss of a tax break.
If you sell your house, you’ll need to pay a capital gains tax on any profits from the sale above $46,000 if you’re a single taxpayer, and $89,000 if you’re married. Your profits are calculated by subtracting the cost of selling from the sale price of the home, and then subtracting this number from the adjusted basis of the property, which is the original purchase price plus any improvements made to the home. The IRS will tax the net proceeds (sale price minus selling costs) at your ordinary income-tax rate if it’s a short-term gain (realized in under one year) or a lower rate if it’s a long-term gain (over one year).
Here’s the catch: If the home’s your primary residence and you’ve lived in it for at least two years, the IRS grants you a big exemption: You can deduct $250,000 in profits ($500,000 if you’re married), on top of your adjusted basis. For many homesellers, this exemption effectively reduces the amount of their taxable capital gains to zero. But if you sell the home sooner than two years, you can’t take it. You are in effect penalized for selling so soon.
Selling your home after just one year, or even less, is certainly possible. However, doing so may carry penalties and tax implications that make it an expensive prospect. Waiting two years is best, if possible, to avoid potential capital gains taxes; to ensure you break even on your homebuying expenses; and to build up a solid equity stake in the property.