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You bought a home and now, less than two years later, you need to sell it. Although you're free to sell your home at any time, a quick turnaround could make it more difficult to profit on the sale—or even avoid a loss. Additionally, there may be tax consequences if you do turn a profit without owning your home for at least two years. Here's what you should know about selling your home before two years are up.
What Happens if I Sell My House Before Two Years?
The main challenges to selling your home before two years are up are turning a profit and minimizing your taxes. Here's how these issues may play out.
Less Time to Turn a Profit
With less time for your home's value to appreciate, it's harder to turn a profit when you sell. Fast appreciation may be possible in a red hot real estate market. But if the market is steady (or cooling), your home's sale price might be similar to—or lower than—what you paid for it. Selling your home quickly also means less time to build equity by paying down your mortgage.
Closing costs and sales commissions further complicate the picture. Closing costs averaged around 1.8% of a home's purchase price (for an average of $6,905 nationally) in 2021, the most recent data from CoreLogic ClosingCorp shows. These costs are typically split between the buyer and seller. Additionally, real estate commissions average between 5% and 6% of a home's sale price, typically paid by the seller.
All told, if you buy a home for $400,000 and sell it for $425,000, you won't pocket $25,000 in profit. In fact, a ballpark estimate of 7% for closing costs and commissions translates to $29,750 in seller's costs—and a $4,750 loss on your home sale. If you've spent money on home improvements, these costs can also reduce your profit. There is some good news: Less profit generally means less in taxable capital gains.
Short- or Long-Term Capital Gains Taxes
Capital gains on a home sale are taxable. Let's say you do sell your home for more than you paid for it—and still clear a profit once you deduct the costs associated with the sale. You'll be required to pay capital gains taxes on the money you make. If it's been less than a year since you bought your home, you'll pay short-term capital gains taxes, which are equivalent to your top marginal tax rate. That means if you're in the 22% tax bracket, you'll pay 22% of your gain in taxes.
If you wait 12 months or more to sell your home, long-term capital gains taxes based on your adjusted gross income will apply. For 2023, these rates are:
| 2023 Long-Term Capital Gains Tax Rates | |||
|---|---|---|---|
| Filing Status | Maximum Adjusted Gross Income for 0% Rate | Maximum Adjusted Gross Income for 15% Rate | Maximum Adjusted Gross income for 20% Rate |
| Married filing jointly and surviving spouses | Up to $89,250 | $89,251 - $553,850 | Over $553,850 |
| Married filing separately | Up to $44,625 | $44,626 - $276,900 | Over $276,900 |
| Heads of household | Up to $59,750 | $59,751 - $523,050 | Over $523,050 |
| All other individuals | Up to $44,625 | $44,626 - $492,300 | Over $492,300 |
Source: IRS
Capital Gains Exclusion
Homeowners who have owned and lived in their homes for at least two years may qualify for a $250,000 capital gains exclusion ($500,000 for married couples filing jointly). The exclusion may reduce or eliminate the taxable capital gain from the sale of your home, but you'll need to meet eligibility requirements. Read on for more details on how this capital gains exclusion works.
What Is the Two-in-Five-Year Rule for Capital Gains?
To qualify for the capital gains exclusion, you must have owned and used your home for at least two out of the last five years prior to the date of sale. Here's a bit of fine print to know about this exclusion:
- The two years don't have to be consecutive. If you've lived in and used your home for an aggregated two years, you may be eligible.
- You can meet the ownership and use requirements during two different two-year periods as long as all requirements are met within the past five years.
- Only one spouse has to meet the ownership requirement, but both spouses must meet the residency requirement to be eligible for the full exclusion.
- You can only claim this exclusion once in two years. If you excluded the gain from the sale of another home within the past two years, you're not eligible.
Exceptions to the Two-in-Five-Year Rule
If any of the following situations apply to you, check IRS Publication 523 to see if you may be eligible for the exclusion even if you don't meet the standard two-in-five requirements:
- You were separated or divorced during the time you owned your home
- Your spouse died during the time you owned your home
- The sale of your home involved vacant land
- You sold your right to a remainder interest (the right to own a home in the future)
- Your previous home was destroyed or condemned
- You were a service member during the time you owned the home
- You acquired or are relinquishing the home in a like-kind (IRS Section 1031) exchange
- You used the entire property as a vacation rental or used a portion of the home, separate from the living area, for business or rental purposes
Other Requirements for the Exclusion of Gain
You are automatically disqualified from excluding your capital gain if you acquired your property through a like-kind exchange during the past five years, or if you are subject to expatriate tax as a U.S. citizen who has renounced their citizenship or long-term resident who has ended their U.S. resident status for federal tax purposes.
Does Your Home Qualify for a Partial Exclusion of Gain?
If you don't pass the two-in-five eligibility test, you may still qualify for a partial exclusion of gain if you have had to move long-distance under certain circumstances. These qualifications can also apply to your spouse, a co-owner or resident of your home.
Moving for Work
You may be eligible for a partial exclusion if you were transferred to a new job that is at least 50 miles farther from your home than your current job, or if you previously weren't working and have accepted a job 50 miles away.
Moving for Health
If you moved to deal with an illness or other medical issue, your gain may be partially excluded. Qualifying events include:
- Moving to obtain, provide or facilitate diagnosis, cure, mitigation or treatment of an illness or medical condition for you or a qualifying family member
- Moving because a doctor recommended a change in residence to deal with a health issue
Unforeseen Events
You may qualify for a partial exclusion if your home was destroyed or condemned, or if it was damaged in a natural or man-made disaster or an act of terrorism. If you, your spouse, a co-owner or someone living in the home died, divorced or separated; had two or more children in the same pregnancy; or went on unemployment or lost their job, you also may qualify for a partial exclusion.
Other Potential Causes
Even if you haven't experienced any of the qualifying events described above, you can still make a case to the IRS that the primary reason for selling your home is work related, health related or unforeseeable if an unexpected event that happens while you own and live in the home makes it difficult or impossible to continue living there.
The Bottom Line
The tax benefits of waiting at least two years before selling your home can be significant—if you expect to sell your home for more than you paid for it. Before deciding to sell, try to size up your profit potential (factoring in moving and selling costs plus taxes) and weigh it against the potential benefits of waiting, if that's possible.
Do you have to sell now? Take heart: Even if you don't qualify for a capital gains exclusion or long-term capital gains rates, having to pay capital gains taxes means you managed to turn a profit. May the money you make help you get established in your next home.