Selling a House After 1 year or Less? You Need to Read This.

Editor’s Note: This article was updated 4/21/20 with the latest info about selling your house early.

Buying a home is a long term investment— except when it’s not. Sometimes, new homeowners are forced to quickly resell their homes because of a new job or a change in their financial status. At other times, they might just have buyer’s remorse, or find a different home they simply like more. And that’s okay. 

But the sooner you resell a house, the fewer financial benefits you’re going to see— and in some cases, you could actually lose money. The market doesn’t regard a quick resale kindly, and capital gains taxes can take a big bite out of your wallet. Let’s look at when, exactly, reselling a home makes financial sense, and ways that a homeowner can maximize their profits in a quick turnaround sale.

Table of Contents

1. What’s the Cost of Selling Your Home After 1 Year?
2. When Selling Your Home After 1 Year is Worth it
3. When Selling Your Home After 1 Year isn’t Worth it
4. How to Calculate Whether It’s Worth It to Sell Your House
   • Selling After 6 Months
   • Selling After 1 Year
   • Selling After 2 Years

What’s the Cost of Selling Your Home After 1 Year?

If you sell your house after a single year, it’s going to be tough to walk away with a profit; in fact, it might be tough just to break even. On a time frame this short, it probably would’ve been more cost-effective to rent. That being said, there are ways to make it work. Before we get to that, let’s look at why, exactly, the advantages of homeownership generally don’t manifest in the first year.

Capital Gains If You Sell Before 2 Years

One of the biggest pitfalls to any investor is capital gains. If you own a house for longer than a year, and turn a profit on the sale, you’re looking at a capital gains tax rate of up to 20%, depending on your tax bracket.

If you sell a house less than a year after buying, you’re looking at an even higher capital gains tax rate, since short-term gains are taxed at the same rate as your income. That means you could be paying as much as 37% in capital gains taxes, if you’re in the highest income bracket. 

Here’s a quick example. Let’s say you had an income of $200,000 in 2019 (putting you in the 24% tax bracket), and you purchased a home worth $300,000. If you sold it in less than a year, and netted a profit of $10,000, that profit would be taxed as a short-term capital gain/regular income. At a 24% tax rate, that comes to $2,400.

But if you waited just a couple more months to sell that house, you’d only pay a capital gains rate of 15%, since holding it for more than a year qualifies you for the long-term capital gains rate. So you’d pay $1,500, saving you $900 in profit. Scale those numbers up for bigger profits and more expensive properties, and you can see how much of a difference a few months can make.

Once you hit the two year mark, though, you’re eligible to exclude $250,000 (or $500,000 as a couple) in capital gains, which will likely exempt your entire profits from capital gains taxes. 

But back to short term resales. The good news here is also the bad news; to be honest, it’s very unlikely you’re going to clear much profit, if any, if you sell in less than a year. In this case, you should be more focused on minimizing losses.

Breakeven Horizon

The breakeven horizon is the point in time when it makes more financial sense to own instead of rent. How is this calculated? Well, renting is almost always cheaper than a mortgage payment, so in the near term, renting costs you less money. 

However, as you pay down your mortgage, and build up equity, owning a home becomes less of a money pit and more of a concrete investment. At some point, the trend lines of low rent (but zero future return) and high mortgage payments (but steadily climbing equity) cross and then head in opposite directions; that precise intersection is the breakeven horizon. 

This takes less time than you might imagine. Using data from 2018, Zillow calculated that the average U.S. breakeven horizon was one year and eleven months. (In more expensive markets, this takes longer; in booming Portland, OR, for example, it takes more than three years.) So in less than two years, owning a home, even with high mortgage payments, becomes a better decision than renting.

Invert that rule, and it states that if you sell in less than two years, it probably would’ve made more financial sense to have rented. 

Closing Costs

You probably remember paying closing costs when you bought the home, but sellers have to pay far more in closing costs than buyers do— often up to 10% of the final sale price, compared to only 2% to 5% for buyers.  

That means that if you sell a $200,000 home, you’re responsible for up to $20,000 in closing costs— money which comes out of your profits. 

Closing costs include charges like title insurance premiums, prorated taxes, home warranty premiums, and transfer taxes and recording fees. That’s a substantial amount of money, and that’s before we get to the biggest single cost: the real estate commission. Commissions are typically 6%, and are split evenly between the listing agent and the buyer’s agent. 

But while commissions are the largest closing cost, they also represent the biggest opportunity for savings. Sellers can sell without an agent, as a FSBO, but that’s been shown to lead to lower sale prices— and on top of that, they almost always have to pay a 3% commission to the buyer’s agent. That means, for all the extra effort they take on as an FSBO listing, they’re only saving on half the commission.

For most sellers looking to cut costs, the most sensible option is the discount agent. These agents offer a full service sales experience for a dramatically lower cost.

Heads up: If you need to sell now, a discount agent can help you save on commission. We’ve partnered with Clever Real Estate to offer top-rated agents who work for $3000 or 1% of your home’s value, saving you thousands in fees.

If you’re selling your home only a year or two after purchasing it, having a full service agent to ensure you get the highest price possible, while also cutting 2% off your commission fees can mean the difference between breaking even, or even making a profit, and losing money on the property. 

Is It Ever Worth It to Sell After 1 Year?

It’s not impossible to make a profit by reselling after only a year, but it can be difficult. That being said, there are definitely circumstances where selling after a year is financially feasible. Let’s look at some of the situations where a quick resale makes sense, and then look at some of the circumstances where it makes more sense to hold onto the property for a little longer. 

When You Should Sell After 1 Year or Less

Large Market Appreciation

Sometimes the market is so red hot that your house appreciates significantly in just one year. If your property spikes in value, it can be worth it to cash in— but before you start looking up agents and making plans for staging, you need to make sure you’re calculating your returns correctly.

Just remember all the ways that selling costs money; you’ll have to shell out a significant amount of money just to sell your house. As we mentioned above, these costs include real estate agent commissions, capital gains, and normal closing costs. 

Forced Appreciation Via a House Flip

There are two kinds of appreciation: natural appreciation, and forced appreciation. As a homeowner, you have no control over the former. Natural appreciation represents the gentle increase, over time, of the entire market, on which your home floats like a boat on a rising tide. 

However, you do have control over forced appreciation. Although the term sounds aggressive, forced appreciation just means any improvement that increases the value of the property. 

House flippers engage in forced appreciation. In fact, it’s their entire business model. 

Things like putting in marble counters, replacing the heating/cooling systems, landscaping, and refinishing floors all fall under the definition of “forced appreciation.” 

If you’re a house flipper— or even if you’re just someone who bought a fixer upper— it can be tempting to sell when you see just how much your property’s value has increased as a result of your work. If it goes high enough, it might be time to cash out.

Can’t Afford Your Home

Maybe you took on a dicey mortgage with vague plans to refinance down the road. Or maybe you overestimated your ability to work your new mortgage payment into an already-tight budget. Or maybe a big unforeseen expense— a leaky roof, a flooded basement— drained your savings and now threatens your ability to keep up with maintenance, insurance, and mortgage payments. 

Whatever the reason, sometimes a new buyer realizes they just aren’t able to meet their financial obligations. 

Ideally, you’d realize this before you actually closed on the sale, but sometimes enthusiasm can make people reckless. If you truly can’t afford the house, it’s better to cut your losses and sell, rather than slowly go bankrupt and then get foreclosed on.

Financial Emergency

Financial emergencies happen, and they can change everything. Whether you lost your job, had a big unforeseen medical expense, or saw your investments tank in a market crash, a sudden financial emergency can change everything. Overnight, a new home can go from a savvy investment to a financial burden; if you find yourself in a tight spot like this, where suddenly you can’t meet your financial obligations, a quick sale might get you the liquidity you need. 

When You Shouldn’t Sell After 1 Year or Less

Absent any special, urgent circumstances, it’s probably not a great idea to sell your home after owning it for just a year. And where the following reasons are concerned, it’s definitely not a great idea.

You Just Don’t Like the House

Are you sure you don’t like the house? You must have liked it, at one point, or you wouldn’t have submitted an offer, gotten financing, and closed on it. Did the qualities you liked about the house, and that made you want to buy it in the first place, disappear since then? 

More likely, you’ve gone from the speculative perspective of the offerer, where you only see the property’s good qualities, to the concrete perspective of the owner, where you only see your responsibilities and obligations. 

Hopefully, you made a list of wants and needs to guide your home search— in other words, the qualities or features you had to have in a home, and the qualities and features you’d like to have. You wouldn’t have bought your house if it didn’t meet the needs and probably offer a few of the wants, too; go over this list now and you’ll likely realize you like your house a lot more than you realize.

On the other hand, if you have substantial reasons for not liking the house— for example, the location is noisier than you realized, and it’s disrupting your sleep, or high crime rates are threatening your well-being— then selling it to salvage your quality of life might be something to consider. Just keep in mind that you’ll probably lose money on the transaction.

Buyer’s Remorse

It’s natural to be nervous about the largest purchase of your life. It’s also natural to feel letdown after a momentous occasion like closing on a house. But this is an emotional reaction to a situation that should be treated with reason. 

Many new owners experience buyer’s remorse because they haven’t stopped looking at other homes on the market. It’s understandable; you’ve just spent months, or longer, combing the market for the perfect home, and it’s a hard habit to break. 

Now that you’re a homeowner, it’s time to cancel those alerts and stop browsing every new listing. The grass may look greener on the other side of the street, but it’s not. As long as you’re comparing the actual to the possible, the actual is inevitably going to be disappointing.

How to Calculate Whether It’s Worth It to Sell Your House

Let’s break down some concrete numbers to determine how much money you’ll make (or lose) by selling after various periods of ownership. 

For this exercise, we’re going to be using the rounded-up U.S. median home value of $250,000, and assuming a 20% down payment ($50,000). First, we’ll look at whether it would’ve made more sense to rent vs. buy, using a calculator that takes in multiple factors from property taxes to renter’s insurance, and then we’ll project how you might come out of the sale, financially.

Selling Your House After Six Months

Over the course of half a year, you’ll pay around $7,296 in rent (using the median U.S. rent of $1,216 for a one bedroom apartment), and $15,600 in homeownership costs. That means it would’ve made more financial sense to rent. 

So if you went through with a sale, how much are you likely to make? That’s hard to say, but over this short period of time, it’s hard to imagine the appreciation would be enough to offset the costs of selling. Even assuming that you see 5% appreciation over your six months of ownership— which is generous— you’ll still have to pay closing costs.

That $250,000 home, after 5% appreciation, would be worth about $262,500. Selling costs 10%, or $26,000. And since mortgages are structured in such a way that the bank gets paid first, your mortgage payments didn’t make much of a dent in your $200,000 principal— according to a standard amortization schedule, you’ll still owe more than $195,000 despite making over $15,000 in mortgage payments.

Using a formula of Sale Price – (Closing Costs + Outstanding Loan), the numbers look like this:

$262,500 – $221,000 = $41,000

Not a great take for all the trouble you went through. In fact, you lost money when you factor in the $50,000 down payment. 

Also keep in mind that your profits will be taxed as short-term capital gains, which is pegged to your income tax rate.

In this situation, when you’re looking at a small profit after short-term ownership, and your biggest expense is commission, it’s definitely worth looking into halving your commission by working with a discount company like Clever Real Estate. In this situation, the seller’s 3% listing agent commission of $7,800 could’ve been reduced to a flat fee of only $3,000, which translates to a savings of $4,800. That’s well over a 10% bump in profits.

Selling Your House After One Year

The numbers if you sell after one year are better— but only a little better. Over this span of time, you would’ve paid $14,592 in rent, compared to $31,200 in homeownership costs. Once again, renting would’ve been the better economic decision.

Since we’re using a longer span of time here, let’s assume 10% appreciation of $25,000, meaning you sell your home for $275,000, with 10% closing costs of $27,500. Your principal after a year of payments would be around $195,000. Running these numbers looks like this:

$275,000 – $222,500 = $52,500

Again, even when we assume a stellar 10% one-year appreciation, your take isn’t that substantial. And that’s before we account for the long-term capital gains tax you’ll have to pay, which can go as high as 20%, depending on your income. 

Considering the $50,000 down payment, you’re basically breaking even. 

Selling Your House After Two Years

Now let’s look at the numbers for a more conventional span of homeownership. If you’d rented for two years, you’d pay total rents of about $29,200 over 24 months, compared to total homeownership costs of $37,700 over that time.

Let’s assume your home increased by 10% each year, increasing to $275,000 by the end of the first year, and $302,500 by the end of the second year. Selling costs come to $30,250, and your mortgage principal is in the neighborhood of $190,000.

$302,500 – $220,250 = $82,250

Selling a house after 2 years makes a lot more sense than selling after 1 year, or after six months. While you’ll still have to put in a lot of hours of work to prep, market, and sell your home, a payout like this seems much more in line with the amount of work necessary. And better yet, if you make sure to own for a full two years, you can exempt your capital gains.

Conclusion

Selling your home after owning it for a couple years, or even less than a single year, isn’t an ideal situation. There are a lot of factors stacked against you: capital gains taxes, closing costs, slow market appreciation, and negative consumer perception. But if you can reduce your costs— especially when it comes to costs you have control over, like commission— you can avoid losing money or, in some cases, turn a tidy profit. Good luck!

One final word: If you’re looking to save on commission when you sell – but don’t want to compromise on service – a Clever Partner Agent can help. These agents work for less, but still provide amazing service you’d expect when selling your most valuable asset.