How Long Should You Live In A House Before Selling?
Scott Steinberg6-minute read
September 19, 2021
Prospective homeowners or existing homeowners contemplating a home sale often ask their REALTOR®: How long should I live in a house before selling? It’s a fair question to consider, given that the length of time that you inhabit a home can significantly impact your ability to turn a profit on the sale of the property in the end.
If you’re a current renter and potential home buyer who’s wondering how long to live in a house before selling, we’re pleased to report that the decision doesn’t have to be as difficult as it seems at first blush. In fact, when you take a few simple variables such as closing costs, capital gains tax and mortgage interests rates into account, the choice becomes far simpler.
Let’s take a closer look at how long you should live in a house before selling, and what it takes to turn a profit on your real estate investments.
A Guide To Building Equity
Potential home buyers should know that real estate is one of the most popular forms of investment that everyday investors can own. That’s because a house can hold and accrue significant value over time – and even grow in value exponentially as consumer demand grows and real estate markets gain popularity.
For example: Say Taylor, a 25-year-old woman, buys a first home in Miami for $200,000. Five years later, following growing home buyer interest in moving to areas of the country that provide better quality of life (and sunny beaches), her home might rise in value to reach $250,000.
Bearing this in mind, it’s financially beneficial to stay in a home for a sizable period of time as it helps you build equity. (Defined as the amount of your home that you own – or the difference between what your home is worth and what you owe your lender.)
After all, fixed-rate mortgages are designed to operate around a series of pre-scheduled payments that include amounts that go toward paying off both the principal loan amount (what you owe on a home) and interest (fees you pay your lender). These mortgage payments become less of a burden as your income increases over time, and more of the funds paid go toward building home equity as you increasingly pay off the principal balance of your loan.
As a point of reference, it may be helpful to note that first-time home buyers tend to stay in their homes for about 11 years. Homeowners who’ve owned a house previously tend to reside in their property for closer to 15 years.
How Long Should I Wait Before Selling A House?
Buying a home is arguably the best long-term investment you can make, depending on how long you choose to reside in it. As a REALTOR® might tell you, in order to make up for closing costs, real estate agent fees, and mortgage interest, you should plan to stay in a property for at least 5 years before you sell your home.
In other words, before buying a home, as a good rule of thumb, you’ll want to ask yourself if you can see yourself living there for half a decade. A big reason for this is that the transaction costs associated with selling your home and buying another can be considerably high.
Why You Should Wait To Sell
As a major financial transaction (and quite possibly one of the largest purchases and sales of an asset that you’ll ever make in your life), it’s important to understand some of the costs and fees associated with selling a home. You’ll want to account for each so as to minimize the chances that you’ll lose money and maximize your odds of turning a profit when you buy and sell within certain timeframes.
Capital Gains Tax
Capital gains tax refers to fees that are levied by the Internal Revenue Service (IRS) on assets that you make a profit on when you sell them. Put simply: if an asset – like a piece of real estate – is bought at a certain price, then sold at a higher one, the difference in the amount of the purchase and sales price is subject to capital gains tax. If you’re a U.S. citizen, you will be required to pay capital gains taxes on these profits.
For instance: Say Bob, a 70-year-old male, purchases a home for $300,000 and sells it for $400,000. His profit of $100,000 (the difference between the two selling prices) represents his capital gains and is subject to the tax.
Capital tax gains rates are currently set at 0%, 15% and 20% depending on your individual income and tax filing status. Be aware that capital gains taxes are only paid after the asset is sold, so you won’t have to pay them until you sell your home. Also be advised that there are two types of capital gains: Short-term and long-term, which are subject to different taxation rates. In general, if you’ve lived in a property for less than a year before selling it, it will be taxed as a short-term gain. If you’ve occupied a piece of real estate for longer than a year, any profits are considered long-term capital gains.
However, if you’ve lived in your home at least 2 years out of the last 5 years (and these 2 years don’t need to be consecutive), you can qualify it as your primary residence. If so, or you’ve owned your home for at least 2 years and haven’t recently claimed another home-related exemption, you may be eligible to avoid this capital gains tax.
Essentially, if you’ve owned or lived in your home for at least 2 years as a primary residence, you won’t need to pay up to $250,000 (or $500,000 for married couples filing jointly) in capital gains on your home sale.
It’s not uncommon for home values to appreciate by 3.5% – 3.8% of their final purchase price per year. By way of contrast, closing costs can generally add up to around 3% – 6% of your loan amount. Bearing this in mind, it could easily take a couple years of staying in your home just to accrue enough appreciation to pay off closing costs alone.
Taking these and other factors into account, you’ll want to crunch some numbers and see how long it makes sense for you to stay in your house for before selling. If your goal is to turn a profit and make money on the sale of a home (especially a first home), it helps to have a better sense of where you stand financially before putting your house on the market.
If you hold a personal loan or home mortgage, you’re no doubt familiar with the concepts of principal and interest.
Principal refers to the actual amount of money that you have borrowed – to calculate it, all you have to do is subtract your down payment from your home’s final purchase price. Interest payments do not go toward paying off this principal loan amount – rather, they’re put toward paying mortgage interest rate fees and charges that you pay on your loan each year.
It generally takes several years for you to begin building equity in your home and for payments to start applying toward your loan’s principal balance in significant amounts. Bearing this in mind, when reviewing loan options, make a point to consider interest payments and the total cost over time of obtaining a specific home mortgage. Different lenders will present different financing options – some of which will prove more favorable to you than others in the end.
Real estate markets are in constant flux, due to changes in market demand. For instance, you may have heard the terms buyer’s and seller’s markets. These refer to times when the market swings in favor of buyers and sellers, respectively, due to too little or too much demand for housing.
Many external factors outside of your control can influence the value of your home – such as the sudden and unexpected rise of a global pandemic. Sometimes, it’s better to wait until market conditions become more favorable before seeking to sell your home.
An ideal state of affairs would be one in which demand for housing in your local area is high, home inventory is low, and you essentially have an in-demand product to offer potential home buyers. Conversely, you’ll likely wish to avoid buying a home if you are in a seller’s market and prices are going upward. After all, real estate is a classic example of a “buy low, sell high” investment – you don’t want to make a purchase if prices are likely to go downward, not upward in the future.
Note that having a look at housing market predictions and forecasts can help you get a better sense of where the market sits at present.
The Bottom Line: Building Wealth In Real Estate Is A Long Game
In general, the longer that you hold onto a piece of real estate, the more equity you stand to build in it. Likewise, the better you’ll be able to offset the initial costs of a home purchase or any costs associated with transferring it to a new owner upon the sale of your property.
That said, it pays to be aware of general market conditions. Any major shifts in supply and demand in your area, or fluctuations in the economy, may have a marked impact on your decision regarding how long you should live in your house before selling.
Keeping all this in mind, you’ll want to take a number of factors into account when deciding whether to buy a home or rent for the time being instead. On the bright side, the best time to be planning for future investments is now. Today is a fine day to get started on considering where you stand on the rent vs. buy debate.