Are You Selling a House After One Year or Less? Here’s What You Need to Know

By: ROS Team

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Property owners are usually advised to hold onto a property for as long as possible. Some researchers have found that most American homeowners keep their properties for an average of 13 years.

Selling a home can be a highly complex task, which is one of the reasons some owners are reluctant about selling their homes. Real estate investment benefits are generally not realized for a couple of years. But what if there’s a slight fluctuation or a big boom in the real estate market shortly after you buy your house? Is it wise to consider selling a house after a year?

When life is moving at a fast pace, there’s hardly enough time to think through regular decisions, much less the selling process. The question that arises here is should you consider selling a house within a year of the purchase or wait longer before putting it on the market. The answer is simple: you can sell your property whenever you want. But you should know the advantages and potential disadvantages that come with selling a house after 1 year.

Can an Owner Sell a House Within a Year of Purchase?

Yes, As a property owner, you can sell your property whenever you want. You can sell your property on the same day you purchased it or wait to sell it after a year or more. It’s best to hold onto your property for at least two years. If you can keep it for at least two years, you will be able to realize more of a financial profit when you sell.

Having said all that, life is unpredictable, and you may encounter circumstances such as health issues, family problems, or job issues that may force you to sell the property you just bought sooner than you’d like. When you don’t have any option except to sell your house within two years of purchase, it becomes even more important that you factor in enough money to cover the buyer’s closing costs and other sales-related expenses.

Advantages of Selling the Home after 1 Year

There are many potential advantages of selling a house after 1 year; we’ve listed them below:

  • You Don’t Like the House

It doesn’t always happen but may occur that your dream home turns out to be not quite as perfect as you’d imagined. You would feel exhausted repairing and renovating it that you decide to sell or the security of the area might force you to sell after 1 year. Whatever the situation is, if you are not happy living in the house you purchased a year ago, it’s best to get rid of it.

  • Family Changes

It may happen that your family circumstances change within a year and you feel like buying a bigger home. It could be the birth of a new baby or an unfortunate death, all of these scenarios can lead you to re-evaluate your living situation.

  • Job Changes

One of the most common reasons for selling a house after 1 year is job relocation. Everyone always pursues the best career and opportunities keep arising that you hardly decline. Even if you don’t have to switch the city, an extended daily commute may also make you think about selling a house. Well, selling up early and moving closer to work could be the best decision for you.

In addition to it, there could be other various scenarios such as flipping a house, looking for a new location, real estate market changes, or you can’t afford the house anymore that you may resolve to sell it, regardless of worrying about taxes, the only viable option left is to sell a house

Disadvantages of Selling the Home after 1 Year

There are a number of potential disadvantages of selling a house after 1 year; we’ve listed them below:

  • Capital Gains Taxes

You’ll have to pay hefty taxes on the profit you make from selling your house.  The capital gains taxes, which are what the taxes on the profits are called, can be calculated by subtracting the property’s original sales amount from the amount for which the property was sold. The government will tax this capital gain with an income tax rate.

The capital gains tax largely depends on your total annual income and the length of time you owned the property. Homeowners with higher annual incomes are subject to a higher capital gains tax rate. On the other side, those who make less money would be subject to lower capital gains taxes.

If you’ve owned your house for at least one year. The tax payment will be assessed at approximately 10% to 37% of your profit. If you have owned the property for more than one year or up to two years. The capital gains tax payment could decrease to 0% to 20% of your profit.

If there’s no urgent need to sell your house, experts recommend that you not sell for at least two years. This will help exempt you from having to pay capital gains taxes, and you will only be taxed if the profit from the sale of your house exceeds $250,000.

  • Closing Costs

Whenever a property title is transferred, you must pay the closing costs. The closing costs tend to be lower for the buyer since buyers do not have to pay for the real estate agent. It makes a big difference. You may be asked to spend 3% to 5% of the total sale price for various fees and escrow charges.

As the seller, you will also have to pay for the real estate agent’s commission. The real estate agent’s commission is usually 6% of the sales price and is not included in other expenses that are 1%  to 3% of the sales price, which consists of the transfer taxes and the property taxes. The seller’s closing costs typically add at least 10% to the home’s sales price.

You can afford closing costs due to capital gain over a long time, but if you are selling your house within two years or a year after buying it, you would not have accrued enough equity or capital gain to offset your losses.

Here is a Breakdown of Potential Closing Costs:

It may be costly when you are moving from one place to another within a year.  You will have to pay to have your personal belongings moved again. If you are moving locally, moving expenses will be exponentially lower than if you’re relocating to another state.

Paying for moving truck rentals and movers can cost thousands of dollars as well depending on where you’re moving. On average, transportation costs alone can range from $200 to $7,500. Packing, storage, or cleaning will be an additional expense.

  • Interest

When you purchase a house using a home loan, you will have to pay the mortgage interest on the loan amount. The interest is simply a bank fee associated with the loan. Most loans are front-loaded, which means you are paying more interest in the first years of the loan. Gradually, as you pay off your principal amount, the amount of interest you’ll pay will also decrease.

For example, let’s pretend you get a home loan of $200,000 with a 4% interest rate, and your annual mortgage payment is $10,000. Your annual interest will be $8,000, which means you only paid $2,000 of your principal amount; you still owe the bank $198,000.

Over the course of your 30- year mortgage term, your interest rate will balance out, and most of your payments will apply to the loan’s principal. This is one of the primary reasons it’s not recommended that you sell your home within a year of buying it; selling your house within a year of getting a home loan won’t give you much equity in the home, meaning you’ll potentially owe the bank more than the house is worth when you sell.

Note: The concept of interest rates can be confusing, but you can get a better understanding by reading the loan payment terms and conditions and by reading the mortgage amortization schedule.

How to Avoid Paying Capital Gains Taxes If You are Selling a House after a Year

You can qualify for the capital gains tax exemption if, for some reason, you have to sell your house within two years of buying it. These reasons include:

  • Job Relocation or Loss;
  • Death of a Family Member;
  • Having Adverse Health Issues;
  • A Legal Separation or Divorce; or
  • If the Home is Condemned or Destroyed

Pro Tip: It is always recommended that you find an experienced person to help you find a way to get the capital gains tax exemption.

Some Tips for Selling a House After a Year:

  • Evaluate whether or not you can afford the closing costs associated with selling the property;
  • Calculate potential capital gains taxes;
  • Look for ways to reduce your taxes; and
  • Try to save money as much as possible before listing your house for sale because you don’t have enough equity in the house and you don’t have enough capital to offset closing costs.

Make Sure You Can Afford the Selling Costs

While you are selling your house before 1 year, consider whether you can afford the moving expenses. You will also have to pay the remaining mortgage taxes and pay the other closing costs associated with the sale. If you’ve set the sales price high enough to cover these expenses. You will probably be in a good financial position to proceed with the move. Otherwise, you will have to find a way to cover these expenses.

If your mortgage includes a prepayment penalty, the lender will fine you for paying your loan off early. This, in turn, can lead to higher selling costs and could result in thousands of dollars in fees. To avoid paying a penalty, it may be helpful to discuss the prepayment penalty with your lender before putting your house on the market.

If you cannot pay the capital gain taxes and comfortably cover your closing costs. You should probably hold off on selling your property until you’ve owned it for at least two years. Doing so will prevent you from having to meet the capital gains tax threshold of $250,000 for an unmarried homeowner or $500,000 for a couple.

Wait Until You Qualify for Lower Tax Rates for Selling a House within a year of Purchase

If you are only a few months shy of owning your property for a year, consider holding onto your property for a few more months. Doing so can help reduce your tax bills.

When you sell a house within a year of buying it. Your profit is taxed using the IRS’ standard tax rates. But when you have owned the home for more than one year. You qualify for long-term capital gains tax rates which are much lower than the ordinary tax rate. If you fall under a higher income tax bracket. The difference in waiting a few months to complete a full year of ownership could mean tens of thousands of dollars.

If you have to move immediately and can’t wait to put your property on the market. You can rent out your house until you’ve met the minimum time that will qualify you for a lower tax rate. It will also save you money in taxes and generate some income that you can apply toward your closing costs.

In this regard, you may choose to sell your property on your own and save funds that would have otherwise had to pay for the agent’s commission.

Final Thoughts

If you are not a professional house flipper. It may be challenging to earn enough by selling a house after 1 year. From a financial point of view. It is not a good idea to sell the house before you’ve owned it for at least a year. It takes many years to build up equity in your property and cover the costs that you have already spent.

Having said all that, life is more important than money. If you have reasons beyond your control that require selling a house after a year. You may qualify for a tax exemption if you have to move for job-related issues or health issues. It may also help if you opt to rent out the house instead of taking the tax hit.

Related Article:

Tax Penalty for Selling House before 2 Years
Common Tips Before Selling Your House For Cash