How Long Should You Live in Your Home Before Selling?

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When purchasing a home, there is a ton of money that goes into it. When the time comes to sell the home, homeowners do so with the goal of making a profit, or at the very least, not losing any money. The question becomes: is there an optimal amount of time people should live in their home before they consider listing it?

​​There is no cut-and-dry answer to this question. Everyone’s situation is different. Before considering selling, it is crucial to assess closing and moving costs, analyze local market conditions, and determine your current home equity.

Reasons people sell their homes

On average, Americans move around 12 times during their lifetime according to the U.S. Census Bureau. There are many various reasons that motivate people to sell their homes and move. A few of these reasons include:

Financial changes: Whether it is personal or market changes, people often move for financial reasons such as a change in income or a change in their living situation.

Downsizing or Upgrading: People both physically and figuratively outgrow their homes. Whether a family is expanding, or parents are becoming empty nesters, each phase of life brings new wants and needs that change with time.

It’s a seller’s market: The housing market can become so advantageous for sellers that the opportunity to make a big profit is irresistible, especially if the property’s value has significantly appreciated since it was purchased.

Community changes: Communities and neighborhoods are constantly evolving and growing. Some people do not want to live in areas that are starting to feel overcrowded or too commercialized.

Friends and family: People move to be closer to relatives, friends, and loved ones. There are also circumstances where people may move to be farther away from them as well.

How long should you own a house before selling it?

As previously stated, there is no specific answer to this question. However, the longer people stay in their home, the better off they will be financially when it is time to sell. This relates to the concept of building equity in your home.

Home Equity represents a homeowner’s financial stake in their home, calculated as the difference between its market value and the remaining mortgage balance. For instance, with a 20% down payment on a $600,000 house, initial equity amounts to $120,000. Waiting to sell reduces mortgage debt, allowing for higher profit retention. Additionally, as home values rise, so does equity. From January 2020 to August 2023, typical U.S. homes appreciated by 19%, averaging 5% annually, driven in part by pandemic-induced housing market surges.

The five-year rule

Realtors suggest a five-year rule to mitigate financial risks, factoring in equity growth and the myriad costs associated with selling and purchasing a home. Depending on home appreciation, some sellers may find it advantageous to sell after just three years. Upon reaching the five-year mark, homeowners should consider the broader economy. For instance, in 2019, the average 30-year mortgage rate was 4.13%, but by 2024, rates neared 7%. This means higher interest costs if the seller intends to purchase another home post-sale.

What to consider before selling
Initial costs

The initial amount paid for the property must be taken into consideration as well as how much is owed if the mortgage is still being paid off. There are also a wide range of other expenses associated with selling a home as previously discussed. It is highly recommended to crunch the numbers and determine the net profit from the sale to ensure that selling is a financially viable decision.

Closing costs

A seller’s closing costs are usually deducted from the home’s purchase price, not paid out of pocket, and vary based on factors like property sale price, location, local tax rates, and legal representation. Real estate commission fees are usually paid for by the seller and typically range between 5% and 6% of the sale price. For example, on a $500,000 sale, a 6% commission comes to $30,000 taken out of the proceeds from the sale.

Capital gains taxes

Consider capital gains taxes if expecting a sizable profit on a home sale. Residential real estate is taxable, but homeowners can typically profit up to $250,000 ($500,000 for joint filers) tax-free, provided they’ve one, owned the property for at least two years and two, it’s been their primary residence for two out of the last five years. Waiting two years can help avoid IRS taxes amid rising property values.

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