Many buyers plan to stay in their new properties for several years. The entire process of researching, house hunting, financing, and moving can be exhausting — and isn’t something most Americans are eager to do again. In fact, 45 percent of people say moving was the most stressful life event they have ever experienced. Not only does a lot of effort go into purchasing a house, but there also might be penalties for selling it early.
However, life happens and your circumstances may change. You might have to move suddenly right after you purchased your home because you got a new job or had a child and need more space. Maybe you want to try a new state or have discovered a love of surfing — or maybe you just need a change.
Selling a home right after purchase isn’t quite like returning a pair of pants. The entire process comes with a few more risks. Here is everything you need to know before you sell your home, including possible tax penalties and your potential financial losses.
Why would you sell your home right after purchase?
Buying a home is considered a long-term investment. Unless you’re flipping houses, it’s unlikely that you will go through the process of buying a home only to sell a few months later. The need to sell your home immediately after purchase usually comes as a surprise.
One of the more common reasons you may need to move unexpectedly is for a job. If your dream job asks you to move cross-country, you’d be hard-pressed to pass up the opportunity. You may also need to move quickly because of divorce or if you’re getting married.
Agents Compete, You Win.
Expecting kids is another catalyst for a fast move. You may not be living in a great school district or the home you currently have is simply too small for a growing family.
You may also want to sell because of financial changes. The mortgage payment could be more than you expected, or you might have lost your job and income. Or, you may have earned a promotion that comes with a huge raise, allowing you to sell and purchase that other, more luxurious home you were lusting after.
Of course, your reason to sell may be as simple as you don’t like the neighborhood or once you moved in, the house didn’t meet your needs and expectations.
Can you sell a house without penalties immediately after buying it?
For whatever reason you need to sell your house, it is possible to do so. However, you’ll likely lose money in the transaction if you sell right after buying. There can be penalties for selling your house early.
When selling your home, you’ll need to cover closing costs. This includes appraisal fees, title insurance, transfer fees, capital gains taxes, inspection fees, and attorney fees. On average, closing costs for a single-family home will run you around $5,749.
Another major cost will be real estate commission fees. Typically, the seller will cover these costs. Commission fees are 5% to 6% of the home’s sale price. For instance, if you sell your home for $200,000, your commission costs will come to around $12,000.
To prep your home for sale, you may also need to spend money on repairs and staging costs for open houses. And of course, you’ll need to budget for moving and relocation expenses.
The other big expense will be paying off your mortgage. And keep in mind when paying your monthly mortgage payment, your initial payments likely go toward interest rather than paying off the principal balance. The longer you keep your home, the less you’ll owe on the principle. If you can, you’ll want to hold on to your home as long as possible to earn equity in the property.
How long do you have to keep a house before selling it?
Ideally, you want to stay in your home for several years to see significant appreciation in your home. Earning equity in your home doesn’t happen overnight, and there are penalties for selling it early. How quickly your home appreciates largely depends on where you live and your particular housing market.
The majority of markets see slow, steadier growth or loss in home values. However, if you live in an especially hot market, your home may gain value far more quickly. In this scenario, you may not lose as much financially when selling your home right after purchase.
Increasing Your Home Value
Granted, you can’t control the housing market. One month you may be able to sell your home for a higher price but the next month home prices fall. What you do have some control over is upping the value of your home through remodels and renovations.
You may be able to increase your sales price if you add upgrades (and overcome any penalties for selling the house early). Larger renovations may be out of the question if you need to move quickly, but you can implement smaller improvements. For example, you could give the home a refreshed look with new paint or cabinet hardware. Any smart tech features will also add value to your home such as a security system, smart locks, or even smart outlets.
However, even with a hot housing market and renovations, if you sell after six months you should expect to lose money on your sale. Six months isn’t long enough to earn significant equity in your home to cover all of your selling costs, which means you will experience self-imposed penalties for selling a house early.
If you wait to sell after one year, unfortunately, you’ll still likely lose money on the transaction. Though, you won’t lose as much as your home has had time to appreciate. While unlikely, you may be able to break even if you live in a hot housing market with strong appreciation.
Selling in a Hot Market Comes With Challenges
So far, 2022 has been a particularly hot housing market. Low inventory and high demand continue to drive up prices as buyers are willing to pay almost anything to get homes. In 2022, Fannie Mae forecasts that home prices will increase by 11 percent over the course of a single year. Their conservative estimates for 2023 see a 3 percent increase in home prices.
Other financial experts show similar gains in the housing market. According to Ramsey Solutions, the average house price in 2021 was $305,000. In 2022, houses are selling for an average price of $392,000. That is a significant gain.
If you know that your home value has shot up over the past year, you may be tempted to sell your house early. You can reap the profits and use the money to buy a larger home. However, keep in mind that a seller’s market creates challenges for buyers. While you might be able to get offers on your property quickly, you might struggle to find a house you can afford.
However, this could be a good option if you want to move to a more affordable area. If you live in an expensive city and want to move to a smaller town or less populated state, selling in 2022 could be a sound decision.
What is the penalty for selling your house early (before two years)?
One of the biggest penalties of selling your home soon after purchasing it is the capital gains tax. Capital gains tax is the tax on the growth in the value of your home. For example, if you bought your home for $200,000 and then sold it for $250,000, your gain would be $50,000. You would then be taxed on the $50,000.
Depending on when you sell, you’ll either pay a short-term capital gains tax or a long-term capital gains tax. These can be pretty major penalties for selling a house early.
Short-Term Capital Gains Tax
If you end up selling less than a year after you bought your home, you’ll face a short-term capital gains tax. Short-term capital gains tax is taxed as ordinary income based on your particular tax bracket. So, if you’re in the 12% tax bracket, that $50,000 you gained on your home will also be taxed at 12%. This means you’d pay $6,000 in capital gains tax.