How Long Should You Live In A House Before Selling?

The burning question on the minds of many current and prospective homeowners is how long they should live in a house before selling. The timing of a sale will impact your profit potential, so it’s a fair question to ask.

Consider several factors, like closing costs and capital gains tax, to determine the best time to sell and maximize your return on investment.

How Soon Can You Sell A House After Buying It?

Buying a home is arguably the best long-term investment an individual can make, depending on how long you live in it. A house can retain or significantly grow its value depending on market conditions. By staying in a home long enough to build equity, you may make a healthy profit when you sell. The typical home buyer expects to live in their home for around 15 years, giving them enough time to stockpile equity.

What’s The 5-Year Rule?

In real estate, the 5-year rule typically refers to the length of time homeowners should aim to stay in their homes to turn a profit when they sell.

It typically takes homeowners 5 years to build enough equity to benefit from property appreciation and recoup their initial home buying expenses, like closing costs. Staying in a home for at least 5 years can also help homeowners avoid short-term capital gains taxes on the sale of their property.

Understanding Equity And How Long To Stay Before Selling

Real estate is a popular investment because homes typically retain or increase their value over time. Understanding what equity is – the difference between a home's current market value and the outstanding mortgage balance – and how equity works is crucial when deciding how long to live in a house before selling.

In a hot real estate market, a home you buy for $200,000 may grow in value to $250,000 in 5 years due to rising home buyer demand. Staying in a house long enough to build equity is a savvy financial strategy – especially if you have a fixed-rate mortgage.

With a fixed-rate mortgage, each monthly mortgage payment you make chips away at the principal loan amount. As more of the principal gets paid off, you’ll gradually increase your ownership stake in the home and build more equity.

What To Consider Before Selling Your House

It’s important to know the fees and factors involved in selling a home. To minimize the chances of losing money and maximizing your profit, you should account for all potential expenses when you sell your home.

Capital Gains Tax

Capital gains tax is a federal tax on the profit you make from selling an asset, including real estate. Simply put, when you sell a home for more than you purchased, the difference between the sales price and the purchase price is subject to capital gains tax.

Suppose you bought a home for $300,000 and sold it for $400,000. The $100,000 you make in profit will be taxed as capital gains.

The capital gains tax gets paid after the sale of an asset for a profit. The rate you pay will depend on your income and tax filing status. Capital gains tax rates are currently set at 0%, 15% and 20%. There are two types of capital gains:

• Short-term gains: Assets held for 1 year or less are taxed at higher rates.
• Long-term gains: Assets held for more than 1 year are taxed at lower rates.

If you live in a home for less than a year before selling it, it will be taxed as a short-term gain. If you stay in a home longer than a year, any profits will be subject to long-term capital gains.

Even if you haven’t lived in your home for the entire 5 years recommended by the 5-year rule, you may qualify for a capital gains tax exclusion. Living in your home for at least 2 years (consecutive or nonconsecutive) out of the last 5 years will qualify the home as your primary residence. If you qualify, you can avoid paying capital gains tax on up to $250,000 of profit (or $500,000 for married couples filing jointly) when you sell your house.

To make an informed decision on how long to stay in a house before selling to maximize your return on investment, you need to understand capital gains tax and its exemptions.

Closing Costs

It’s common for home values to appreciate by more than 5% of their final purchase price in a year. While sellers benefit from the boost in home value, they also have to cover closing costs when they sell their homes. Sellers will likely stay put for a few years to accrue enough appreciation to cover their closing costs.

You’ll need to crunch some numbers to estimate how long you should live in the house before selling. If your goal is to turn a profit (especially with a first home), it helps to have a better sense of your financial health before putting your house on the market.

Local Market Conditions

Real estate markets shift in response to changes in demand, creating buyer’s and seller’s markets. If you’re selling in a buyer’s market, it may make more sense to wait until market conditions favor sellers before listing your home. A seller’s market features low inventory and high housing demand.

Monitor housing market predictions to help decide on the right time to sell.

The Bottom Line

Traditionally, the longer you hold onto a piece of real estate, the more equity you can build. To maximize your return on investment, you should have enough equity in your home to offset the initial costs of the home purchase and all costs associated with transferring the property to its new owner after the sale.

It also pays to be aware of market conditions. Major shifts in supply and demand in your area and the economy’s health may be deciding factors that dictate how long you should live in your house before selling.

When you eventually sell your house, the new burning question you’ll likely need an answer to is whether to rent or buy your next home. Review the recommendations in our renting versus buying guide to help streamline your decision and find the right housing fit for you.