If you purchased a starter home and are now considering moving up, you may wonder how long you should own your house before selling. While it’s impossible to know for sure what market conditions will be like in any area in five or ten years, trends and calculations can help you make an informed decision.
5 Factors to Decide How Long You Should Own Your House Before Selling
Answers to this question vary because there is no one-size-fits-all for how long you should own your house before selling. This depends on your mortgage, capital gains, closing costs, equity, market conditions, and your own circumstances.
1) Your Mortgage
If you want to make money on your home sale and upgrade to a bigger home, the sale price must be greater than your remaining mortgage. During the first few years of your mortgage, you’re paying far more in interest than the principle. This makes it difficult to make money on a sale in under five years. However, if you purchased a more modest home with a larger down payment, you probably have a smaller mortgage amount and interest rate. With this arrangement, you can sell your first home faster and make a profit.
2) Capital Gains Tax
Regardless of other factors, it’s best to live in the home at a minimum of two years before selling. If you live in your home as a primary residence for at least two of the five years prior to sale, you can exclude $250,000 ($500,000 for married couples) of the profit from your sale. If you don’t live in your home for at least two years, you’re generally not eligible for a capital gains exclusion. This means you must report any profits (sale price received minus sale price paid and expenses) from the sale on your taxes and deduct capital gains tax at a rate dependent on your income.
You build home equity when you pay off the principle on your mortgage or when you make improvements to the home that increase its value. How much equity you’ve acquired depends on your mortgage and on renovations or remodeling you’ve done. If the first home you purchased was already in pristine condition, it’s difficult to build sweat equity. However, if you remodeled the bathroom or kitchen, added a deck, refinished the floors, finished the basement or made other improvements, you’ve increased the home’s value and gained equity. You can conduct these projects quickly or slowly, but it’s best to take on projects that maximize your investment before selling.
4) Market Conditions
Real estate markets have highs and lows that tend to follow an 18-year pattern. If you purchased your home during a recession such as that between 2008 and 2013, selling now while the markets is at a sales peak may maximize the home’s value. However, if you purchased a home later during the recovery stage, such as around 2014 to 2016, selling too soon could cause you to lose money.
5) Buying and Selling Costs
The costs of buying and selling are an important, often overlooked, factor when determining how long you should own your house before selling. When selling your home, a qualified realtor will generally require a commission of 6%. When buying a new home, you’re likely to pay closing costs between 3 and 6% of the new home’s price. Calculate these expenses first to know how much you need to sell your original home for to cover the costs of your new one.
Besides market trends and equity calculations, you also need to consider your circumstances. If you’re moving to be closer to a job or your family, other calculations may be less important. If your family is growing and you need more space, you may not have time to wait. However, if you have time to consider all your options, making these calculations can save you money in the long run.