Sell a House Before 2 Years
According to the Joint Center for Housing Studies of Harvard University, 13% of Americans move each year. Some of them haven't even lived for more than two years on their latest property. This brings us to the question, is it possible to sell a house before two years?
Selling a house before two years is ultimately possible. However, the money invested in the property won't be fully recouped and the homeowner would owe taxes. Nevertheless, if selling the house is the only option, getting a cash offer or working with a real estate agent are the two most common options.
If you want to learn more about selling the house before 2 years, check out the rest of this blog. This covers the factors to consider when selling, avoiding tax penalties, selling options, and more!
Can You Sell a House Before 2 Years?
Yes. You can sell a house before two years; however, this is highly discouraged because the property hasn't appreciated yet in value and you won't be able to avoid paying capital gains.
If you are really convinced to sell your personal property before two years, you can either sell through a cash buyer or a real estate agent. Among these two options, selling for cash is more favorable since it's hassle-free and fast.
Factors to Consider When Selling a House Before 2 Years
In deciding whether to sell a house before two years, there are three major factors that should be considered.
Selling Costs and Net Proceeds
In selling a house, the goal is to close with as much money as possible. Thus, you have to look at your net proceeds.
Note the purchase price, the current value of the property (based on the value stated in the estate tax return or appraisal), and how much you still owe in a mortgage. You also have to factor in inflation and your cost of living.
Unless your house has dramatically appreciated in less than two years, you will lose money when you sell. More so when its value depreciated. You won't have enough equity to pay off your mortgage so you have to pay out of pocket.
What I'm trying to say here is that you have to calculate these figures to identify whether it is economical for you to sell.
Remember that aside from paying off your mortgage, you would also spend a great amount of money on staging your house, taking professional pictures of the property, and other marketing requirements when you sell with a real estate agent.
When deciding to sell a house before 2 years to the local market, you should also look into the closing costs that you'll pay out of the home's purchase price. But if the house doesn't have enough equity, you would pay for these from your own savings.
Closing costs are usually 1% to 3% of the net proceeds. This includes title search, title insurance, home inspection, appraisal, survey, transfer taxes, legal fees, settlement fees, recording fees, mortgage interest payoff, and a lot more. You also need to pay for a real estate agent's commission fee which can amount to 5% to 6% of the proceeds or capital gain.
Capital Gains Taxes
Selling before two years means the homeowner cannot avoid paying capital gains. That means, he would be paying capital gains taxes in full while also settling income taxes.
This is one of the major reasons why many homeowners defer selling a property. They let the property accrue enough equity to pay the capital gains taxes as well as the closing and selling costs of the sale.
Common Reasons for Selling a House Before 2 Years of Acquisition
Selling a house before 2 years is not uncommon. A lot of homeowners are left with no choice but to sell their property for one of these reasons:
People who were hit by financial hardship usually sell their property to downgrade even though they just bought it.
Couples who are divorcing and employees who were requested to relocate are also top sellers of homes before two years of ownership.
But aside from these sad financial concerns, there are also good reasons why homeowners let go of their primary residences or investment properties before two years of purchase:
- They got married.
- Their gross income has grown significantly and they want a better house.
- They want a different house layout.
- They bought a new home in a new city and they want to avoid paying a double mortgage.
Homeowners may want to upgrade when expanding their family. They may need a bigger yard for children to play in or a house with more rooms to accommodate aging parents or relatives; hence, they sell their current house even though they just acquired it more than a year.
Another reason for selling may be the need for a home office. More and more people are working from home these days and having a home office, especially when there are little kids at home, is necessary to avoid distractions.
The Market is Hot
If the value of your property has appreciated significantly in less than two years, it really makes sense to sell your house. The equity would be enough to pay taxes and other fees related to the home sale.
Usually, houses situated in booming areas are quick to appreciate in value making the local real estate scene a seller's market.
Is There a Tax Penalty for Selling a House Before 2 Years?
Yes. Selling a house before 2 years can result in a significant tax penalty. Specifically, capital gains taxes.
Capital gains taxes are taken out of the profit of a home sale or capital assets you have and is carried out by the Internal Revenue Service (IRS). This is taxed similarly to an ordinary income.
If the property is sold at a much higher price than when it was purchased by the seller, the difference is taxable. To illustrate, if Michael bought a house for $300,000 and sold it for $450,000, the $150,000 is the taxable gain; therefore, it is subject to capital gains taxes.
There's a loophole in this that helps homeowners avoid capital gains. That is if they have lived in the house for at least 2 years in the past 5 years preceding the sale.
These two years don't have to be consecutive according to the Taxpayer Relief Act. For a married couple filing jointly, they can avoid $500,000 in capital gains following this rule. Meanwhile, single homeowners can avoid up to $250,000 of tax burden.
Unfortunately, this capital gains exclusion won't apply if you sell your home before two years and you only have short-term gain.
You would pay short-term capital gains tax (based on your income tax rate or ordinary income) and other tax implications right after you sell your house. This means the capital gains taxes should be paid in full in less than a year.
Aside from the length of time you've owned the property, your short-term capital gains tax penalty for selling would also depend on two other factors according to the tax code— the capital gains tax rate of your state and whether you are a resident or non-resident of the state (your tax filing status).
For example, California has a high tax rate so expect to pay high capital gains taxes.
However, if you are considered a non-resident and you sell your home after less than two years of ownership, you won't end up paying capital gains taxes.
How Do You Reduce or Avoid Capital Gains Taxes When You Sell Your House Before 2 Years?
While you cannot completely avoid paying capital gains when you sell your home before 2 years of ownership, you can reduce your tax penalties to a more manageable amount. Here's how.
- Capital Losses: If you bought your house for $400,000 and only sold it for $300,000, your $100,000 capital loss can be deducted from your taxable income. So, if you sold the house for $300,000, only $200,000 would be subject to capital gains thanks to the deduction of capital losses.
- Depreciation: When selling a rental or investment property that has depreciated in value, the capital loss can also be deducted from the taxable income under Schedule Ewhen you pay capital gains tax.
- Exclusions: You can also deduct charitable contributions, unrealized gains from your stock, etc. from your taxable income.
- 1031 Exchange: For an investment property, taking advantage of the 1031 exchange or the like-kind exchange can defer paying capital gains four your taxable income. In this strategy, you have to use the sale proceeds or capital gain as a down payment for one investment property within 180 days of selling your previous rental or business property.
- Installment Contract: If the buyer purchased your home through an installment contract, your tax burden will be spread over several years instead of paying for it in one year. You still have to pay taxes, but it would be more manageable.
Is There a Partial Capital Gains Tax Exclusion?
Yes. There is a partial capital gains tax exclusion if you need to sell the property before two years of owning it.
The Internal Revenue Service (IRS) says you can avail of this if you have a good reason for selling your home before two years. Here are some of the best unforeseen reasons when selling your home:
- Relocation due to employment
- Health issues that require you to relocate
- Death of a family member
- Not being able to afford the house due to a change in marital status
- The house was destroyed by a natural disaster
- You had multiple births in the family
- The child of the homeowner is being bullied and school and they have to move
- The homeowner wants to adopt but adoption laws require a new room which the current house doesn't have
- The homeowner was assaulted by neighbors
- Moving to a senior retirement community
The capital gains tax is calculated based on the length of time the homeowners stayed in the property within 2 years. For instance, if you are single and you lived in the house for 1 year, you may exclude a 50% tax rate from capital gains which are $250,000 according to tax rules.
How to Sell a House Before 2 Years
Selling a house before 2 years is just like typical real estate transactions. The only difference is the tax penalty for selling. That said, you can also sell with a real estate agent or a cash buyer.
Sell Your Home to a Cash Buyer
Selling your home before 2 years to a cash buyer means a faster home sale. This may be advantageous if you want to sell due to relocation or divorce.
Here are the top reasons to sell to a cash buyer:
- No Inspection: Although the cash buyer will conduct a home walk-through, they are more lenient than an inspector. You also won't need to take action about the result of the inspection.
- No Appraisal: Professional appraisal for a primary residence can be expensive. Luckily, this isn't required when you get a cash offer. The cash buyer would price your property for you.
- No Repairs: Even if the house has a lot of damage, the cash buyer won't require you to address them to get the house up to code. You can save money on repairs.
- No Closing Costs: Closing costs, as mentioned earlier, can cost 1% to 3% of the proceeds. The cash buyer would cover this for you so you get enough money to pay taxes.
- No Commission Fees: Real estate agent fees are also expensive, but since there's no need for a real estate agent in a cash sale, there are also no commission fees.
- Less Paperwork: Unlike traditional sales that have a lot of paperwork due to mortgage application, a cash sale has significantly less paperwork and most of it is handled by the cash buyer.
- Less Risky Overall: A cash sale is less likely to fall through because there is no mortgage lender involved.
- Flexible Timeline: Again, the absence of the lender in the picture makes the sales timeline a lot more flexible. You can communicate when you want to move out and close according to your schedule.
To sell to a cash buyer, fill out a form on their website or give them a call to ask for a cash offer. After this, they'll visit your property to assess its state and make a more accurate offer.
Once you've agreed on the best price, they'll send a contract that you have to review and sign. When all is settled, the sale would proceed to the closing table.
Sell With the Help of a Real Estate Agent
Selling a primary residence before 2 years with a real estate agent is like typical home sales. You will also end up paying capital gains taxes based on your income tax rate.
You have to plan a marketing strategy with the real estate agent, request for inspection and appraisal, price your property, do some staging, take professional photos, list the property, schedule showings and open houses, and negotiate.
I assume that you want to sell before 2 years because of a time-sensitive reason. If this is indeed the case, it is not ideal to sell with a real estate agent as the process takes time. Unless of course, it is a seller's market.
Frequently Asked Questions
How Much is Capital Gains Tax on the Sale of a Home?
According to Bankrate, short-term capital gains tax could be as high as 37%just like how ordinary household income is taxed.
Meanwhile, for primary residences that are owned for more than a year, it is taxed at 15% to 20%. The exact amount of short-term capital gains tax would still depend on your tax bracket.
How Long Do You Have To Live In Your House To Avoid Capital Gains Tax?
You should wait for at least two years of ownership before selling a house if you want to avoid paying taxes.
After two years, you can avail of capital gains exclusion if the house is your primary residence and you lived in it for 2 years within the past 5 years prior to the sale. There are also other specific requirements to avoid capital gains taxes.
Does Selling Your Home for Cash Affect Capital Gains?
Capital gain is a tax penalty taken against the difference between how much you bought your home and how much you sold it.
Thus, whether you sell for cash or you sell with an agent, the amount of the capital gains that would be collected will be affected. It isn't possible to sell your home tax-free.
Do You Pay Capital Gains Taxes on the Sale of a Rental Property Before 2 Years?
Yes. You need to pay capital gains tax on the sale of a rental or investment property before 2 years. This would depend on your tax bracket. Generally, the tax penalty for a rental property is even more significant than a family home.
The only way around it is to file for Section 121 or primary residence exclusion, leverage Section 1031 or the like-kind exchange, or offset the gains with the losses.
Final Thoughts: Sell a House Before 2 Years
As discussed in this blog, selling a house before 2 years of ownership is possible. After all, you are its legal owner. However, many real estate experts and homeowners are against this since there is a tax penalty for selling. You won't be able to avail of full capital gains tax exclusion since you haven't lived in the property 2 years before the sale.
Nevertheless, if a home sale is your only option due to unforeseeable circumstances, you can still push through with a sale even with the looming tax penalty. We highly recommend selling to a cash buyer for a fast and easy sales process.
Here at House Buyer Network, we'll give you a fair cash offer for your property. We will also cover closing costs and other fees related to the sale so you don't have to pay anything out of pocket.
Fill out our form below or call us at (855) 835-2544 to start selling your house before 2 years.