Selling Your House Before 2 Years: Capital Gains Tax, Tax Penalty, and More

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Unexpected tax bills have hit countless homeowners who have engaged in premature moves. Over the last five years, 40 million Americans have moved every year, and many of them have found themselves losing out because they moved too quickly.

Selling a house 2 years after buying is rarely an ideal situation. So what happens if you sell your house before 2 years are up? Unlike most moves, you’ll be subject to capital gains tax, which could amount to thousands of dollars.

Here’s your guide to keeping more money in your pocket to avoid getting stung when moving your primary residence within two years of buying.

Can you sell your house before 2 years?

Can you sell your house before 2 years? 

Yes, you can legally sell your house before 2 years, but there are some financial consequences you should be aware of. 

Capital gains taxes apply to owning real estate for a short period to tax investors who make gains on flipping homes. Sadly, some homeowners find themselves inadvertently caught up in this, even if they’ve got a valid reason to move. 

The American tax system doesn’t distinguish between investors looking to flip a house and people moving due to unforeseen circumstances. Common reasons why someone might need to sell their house before 2 years are:

• Job relocation
• Health issues
• Family emergencies
• Financial crisis
• Major changes in circumstances, such as a divorce
• Buyer’s remorse

When selling your house before reaching the 2-year mark, there are several factors to consider:

• Capital Gains Tax: If you make a profit from the sale of your house, this is considered a capital gain. Since you haven’t owned the home for at least 2 years, this profit will likely be subject to short-term capital gains tax, which is taxed at the same rate as your ordinary income.
• Tax Penalties: If you’re selling your primary residence before 2 years, you miss out on the capital gains tax exemption, which allows homeowners to exclude a certain amount of the gains from their taxable income if they’ve lived in the home for at least 2 of the last 5 years.
• Real Estate Agent Fees: Selling a house involves real estate agent commissions, which can be a significant portion of the sale price.
• Lack of Equity: If you’ve owned the house for less than 2 years, you may not have built up enough equity for the sale to make financial sense after accounting for real estate agent fees and other selling costs.
• Market Conditions: The state of the real estate market can also influence whether selling before 2 years is advantageous. If you’re selling in a seller’s market, you might still be able to make a profit despite the tax penalties.
• Relocation and Other Costs: Moving involves costs beyond just selling the house. You’ll also need to consider moving expenses, the cost of finding a new property, and potentially overlapping mortgage payments.

Given these factors, while it is legal to sell your house before 2 years, it is important to weigh the financial implications. 

It may be more beneficial to hold onto the property longer to build equity and potentially qualify for tax benefits. However, personal circumstances and market conditions could make selling earlier a sensible option for some homeowners. 

Consult with a real estate agent to make an informed decision.

Capital Gains for Selling a House Before 2 Years

What happens if you sell your house before 2 years? In the eyes of the IRS, you’re eligible to pay capital gains taxes on any profit you make from the property. 

This is because your home will be classified as a capital asset, even if it’s your primary property. So, is it bad to sell a house after 2 years? The chances are, yes, because even if you make a profit, any gains will likely be wiped out by selling fees.

Capital gains taxes will be paid at the standard rate if you sell before the two-year mark because you won’t receive any exemption.

To avoid the taxes on a sale of a home, you must use the property as your primary residence for a minimum of two years. Doing so will ensure you avoid any capital gains penalties.

Is there a penalty if you sell your house before 2 years?

There might not be a direct penalty for selling your house before 2 years, but you could lose money due to taxes and other costs. 

Unless you’re in a hot market where property values are surging, selling your house early often leads to financial losses. This is mainly due to the capital gains tax and selling costs that apply when selling a house before it has been owned for 2 years.

By selling before the 2-year mark, you miss out on the Section 121 exclusion, which allows homeowners to exclude a portion of the gains from their income for tax purposes if they have lived in the home as their primary residence for at least two of the last five years. Single filers can exclude up to $250,000, and married couples filing jointly can exclude up to $500,000.

Apart from capital gains taxes, you have to account for other selling costs such as real estate agent fees, staging, inspection fees, repair costs, and closing costs. When selling within a short timeframe, these costs can significantly diminish any profits or even create a loss.

5-Year Rule in Home Ownership

What happens if you sell your house before 2 years? Capital gains taxes. Homeowners need to consider the 5-year rule for selling a house when analyzing their short and medium-term futures.

The five-year rule isn’t part of the tax code or the law. It’s an investment principle stating that the longer you keep your home, the more profit you can expect. Experts recommend holding your property for at least five years to avoid losing money on your investment.

What factors are involved in potentially appreciating your primary home?

• Location – Some areas are more appealing than others. For example, nearby green spaces can add 20% of value to your home.
• Supply and Demand – Due to low supply, house prices have risen by 20% in one year. Supply and demand imbalances can cause surges in real estate appreciation.
• Comparable Properties – Rising tides lift all boats within the real estate market. A local seller’s market can cause price rises across the whole area.
• Size/Usable Space – Finishing an attic, basement, or building an extension can dramatically enhance the value of a home.
• Age/Condition – Age alone doesn’t define appreciation, but the condition does. General home improvement can make your home more attractive.
• Upgrades – Adding new features to your home, especially if they’re in high demand, are another factor that can increase your home value.
• The Economy – According to the Washington Post, inflation increases home prices. Booming economies do the same, but a recession could cause your appreciation rate to drop.

How to Find the Value of Your Home

Your home’s value changes all the time. So whether you’re planning for a home resale or not, it’s always good to know where you stand.

Consulting an experienced realtor to value your home is the best way to get an accurate estimate. Ordering a professional appraisal is even better if you want precise dollar figures.

Note that online platforms offering home valuations will only offer a ballpark figure. Typically, these numbers are based on recent sales in your area.

What are the Costs of Selling a Home?

Deciding to sell your home means accounting for selling costs. To make a profit, you will need to ensure your home’s value exceeds the original price plus selling costs.

In most cases, you can pay 9-10% of the final agreed-upon price in fees. Here’s what you can expect to pay:

• Staging/house prep
• Realtor commissions
• Inspection fees
• Repair costs
• Closing costs, such as escrow, title, transfer, prorated property, and recording fees
• Seller concessions
• Moving costs
• Mortgage payoff
• Overlap costs

Many sellers are shocked at how high selling fees can be. You may also need to account for the second set of closing costs as a buyer if you’re in the process of purchasing another property.

What Other Options Do I Have Besides Selling?

The average length of home ownership is just eight years, with the median being 13 years, based on the National Association of Realtors numbers. So most people will easily surpass the two-year limit, but if you need to move urgently, what other options do you have?

Rent Your Home

If you’ve yet to build sufficient equity in your home, one option is to rent your home and allow it to appreciate. Of course, there are costs to consider, such as hiring a property management company and extra insurance, but there are also tax breaks.

The viability of renting your home depends on which market you’re in. If you live in or close to a tourist market, renting your home could build equity and provide a secondary stream of income.

Speak to a tax accountant if going down the rental route, as it will impact your taxes.

Hold Onto Your Home

What happens if you sell house before 2 years in a buyer’s market? In short, you stand to lose thousands due to a lack of appreciation and closing costs.

Holding your home and allowing it to appreciate can be a wise move. But unfortunately, some families keep these homes as vacation homes until they decide to sell further down the line.

Obviously, there will be ongoing maintenance costs to holding a second home, so ensure your income is sufficient to cover these added expenses.

Pursue a Short Sale

Short sales are commonly used as a method to avoid foreclosure. It’s far from an easy way out, but you could be a candidate if you’re behind on your mortgage payments or the market has crashed, and you owe more than the property is currently worth.

Short sales come with additional penalties, including financial and credit score implications. As a result, most real estate experts advise against short sales for anything but as a last resort.

Should You Sell Your Home Before 2 Years?

Nothing prevents you from selling a home six months after buying it. The problem is only the hottest markets, and the most turbulent economic conditions can yield a large profit in two years or less. However, with the capital gains exemption after two years and relatively high selling costs, everything changes at the two-year mark within the real estate business.

Rarely does it make sense to sell a piece of real estate within two years. If you can, remain living in the property until you have two years under your belt. If you absolutely have to relocate immediately, try to keep the property for as long as possible to take advantage of appreciation.

Talk to a real estate expert about some of your options if you find yourself in this scenario.

Connect with an Expert Real Estate Agent with Fast Expert

Now that you know what happens if you sell your house before 2 years, the next step is to consult a professional realtor in your area. Working with the right realtor is worth its weight in gold because they can net you the best price and advise you on the optimal time to sell based on their knowledge of the local market.

Find your realtor with Fast Expert. Connect by entering your zip code and city to get a list of the top real estate agents in your local market, complete with reliable, independent customer reviews now.