What To Consider Before Selling Your House
It’s important to know the fees and factors involved in selling a home. To minimize the chances of losing money and maximizing your profit, you should account for all potential expenses when you sell your home.
Capital Gains Tax
Capital gains tax is a federal tax on the profit you make from selling an asset, including real estate. Simply put, when you sell a home for more than you purchased, the difference between the sales price and the purchase price is subject to capital gains tax.
Suppose you bought a home for $300,000 and sold it for $400,000. The $100,000 you make in profit will be taxed as capital gains.
The capital gains tax gets paid after the sale of an asset for a profit. The rate you pay will depend on your income and tax filing status. Capital gains tax rates are currently set at 0%, 15% and 20%. There are two types of capital gains:
- Short-term gains: Assets held for 1 year or less are taxed at higher rates.
- Long-term gains: Assets held for more than 1 year are taxed at lower rates.
If you live in a home for less than a year before selling it, it will be taxed as a short-term gain. If you stay in a home longer than a year, any profits will be subject to long-term capital gains.
Even if you haven’t lived in your home for the entire 5 years recommended by the 5-year rule, you may qualify for a capital gains tax exclusion. Living in your home for at least 2 years (consecutive or nonconsecutive) out of the last 5 years will qualify the home as your primary residence. If you qualify, you can avoid paying capital gains tax on up to $250,000 of profit (or $500,000 for married couples filing jointly) when you sell your house.
To make an informed decision on how long to stay in a house before selling to maximize your return on investment, you need to understand capital gains tax and its exemptions.
Closing Costs
It’s common for home values to appreciate by more than 5% of their final purchase price in a year. While sellers benefit from the boost in home value, they also have to cover closing costs when they sell their homes. Sellers will likely stay put for a few years to accrue enough appreciation to cover their closing costs.
You’ll need to crunch some numbers to estimate how long you should live in the house before selling. If your goal is to turn a profit (especially with a first home), it helps to have a better sense of your financial health before putting your house on the market.
Local Market Conditions
Real estate markets shift in response to changes in demand, creating buyer’s and seller’s markets. If you’re selling in a buyer’s market, it may make more sense to wait until market conditions favor sellers before listing your home. A seller’s market features low inventory and high housing demand.
Monitor housing market predictions to help decide on the right time to sell.