Capital gains | Housing market | Equity | FAQs
Knowing exactly when to sell your house can be tricky. But in most cases, we recommend staying in your house between five and seven years.
Though that general advice provides a good rule of thumb, it may look slightly different when applied to your specific goals and situation. Maybe you’ve outgrown your house and need to relocate ASAP — or maybe you’re counting on the home sale proceeds to support your retirement.
Whatever your reason, there is an ideal length of time to live in your house before selling. The right advice can help you build home equity before buying a new house.
Sell your home too soon, however, and you could walk away with little or no equity. If the market turns or you overpaid, you may even end up upside down.
To learn how long you need to hold on to your home before selling, you should consult a qualified, local real estate agent. Find a top agent near me today!
If you're earlier in the process, finding out your home's true value is a good place to start. It will help you determine whether or not your home has appreciated in value so you can decide whether it's the right time to sell.
» MORE: Get a free, instant home value estimate now!
Factors that affect how long you should live in a house before selling
1. Capital gains
When you sell your home, you may be responsible for paying taxes on the money you earn — depending on how long you’ve lived there.
To (legally) avoid these taxes, you’ll have to live in your home for at least two of the past five years.
»LEARN: What are capital gains taxes?
2. Transaction costs
Selling a house costs money — typically 10% of the sale price. For example, if your home sells for the 2020 median sale priceof approximately $263,000, you could expect to pay around $26,000.
Taking these costs — and your home’s equity — into account, you’ll probably want to live in it between five and seven years.
Before listing your house, make sure to calculate the amount of money you’ve paid toward it.
You want to add up the money you’ve paid in your mortgage toward your house, and the money you put down on your house in closing costs and a down payment.
You don’t want to break even or end up right back at the beginning when purchasing a new home.
3. The housing market
Keep an eye on the market in your area as it cycles through periods of favoring buyers or sellers. If you study patterns in the housing market, you’ll be better equipped to sell at an advantageous time.
Sellers who pick the right moment can end up walking away with more money from the deal.
Home Value Estimator
How can I avoid capital gains taxes?
Most people talk about avoiding taxes behind closed doors or on gimmicky sites.
If you want to avoid capital gains taxes on your property legitimately, you must live in your house at least two of the last five years.
There are many people who use this rule to their benefit.
For example, many flippers find an undervalued first home for a great price and fix it as they live in it. They’ll replace carpet, tear down walls to open up the main floor, and update the kitchen. They’re in no rush — and because they have instant equity in the house, they have money to work with.
At the end of two years, they’ll list the home for sale and boom! They’ve made money without paying capital gains taxes that they can move into their next home.
How does the housing market impact selling?
Even if you’re living in a starter home, there are good reasons you may want to stay for longer than a few years. One of those reasons is the housing market.
Savvy home sellers watch the market for the peaks and valleys, which signal the best times to buy and sell. Most people say the housing market turns around about every seven years.
In other words, you should plan to stay in your house for about seven years for a chance at a greater return on investment (ROI).
According to 2020 data from the National Association of Realtors (NAR), the average homeowner stays in their house for 13 years.
In cities where homeowners don’t tend to stay as long, NAR found that the average homeowner sells after eight years.
It’s no coincidence that these numbers nearly align with the seven-year housing market cycle.
How does my mortgage payment affect equity?
When you’re thinking about selling, your mortgage payment should play into the equation.
During the first few years of owning your house, your mortgage payments will probably go toward your interest, not toward the principal.
When you sell your home, you’ll want to have as much equity as possible by paying off as much of your mortgage as you can.
If you bought at a higher interest rate due to subpar credit, you may want to pay a little more each month to make sure you really get your money’s worth.
And if you plan to buy a new home, pay attention to mortgage interest rates and whether it's a seller's marketor a buyer's market. If you time it right, you can get a favorable mortgage rate with a low monthly payment.
How do closing costs affect equity?
You’ll also want to watch closing costs. When you sell your house and go to buy another, you are promising more closing costs that must be funded.
Most of the time, closing costs are 2% to 5% of the purchase price of the home. For example, if you buy a $240,000 home, you can expect to pay between $4,800 and $12,000 in closing cost.
If you’ve only lived in your home for a short timeframe and have around $10,000 worth of equity in it, you may end up losing it all to closing costs.
FAQs about living in a house before selling
That depends. If you have enough cash on hand, you can easily buy a new home before selling your old one. But, if you plan to get a mortgage on the new home, you'll need enough income to afford both payments until your old house sells. You won't qualify for a second mortgage if your debt-to-income (DTI) ratio is too high, so you may need to sell your house fast to avoid missing out on your dream home.
In most cases, you should avoid selling a house after a year or less. Realtor fees will take a huge bite out of your sale proceeds, and if you do turn a profit, you'll likely owe capital gains taxes. If you absolutely need to sell, you need to make sure you earn enough on the sale to pay off your mortgage and cover your closing costs. Working with a low commission real estate agent is the best way to keep as much money in your pocket as possible.