What is the 5-Year Rule for Selling a House?

What is the 5-Year Rule for Selling Your Home?

Let's say that you are residing in your current primary residence for fewer than five years. Now you need or want to move because of a change in life circumstances. When you are considering making a move, the two most common questions are centered around money: Will you be making a profit on selling a house so soon after purchasing it, and will you have to pay taxes on potential profit from selling the house?

In the world of real estate, there is something called the five-year rule, a general rule of thumb for homeowners recommended to live in their home for at least five years before looking into selling their property without being at risk of losing money on their investment. However, there is more to consider than the years when determining if it is the right time to sell for you.

In this article, we will take a look at what the five year rule is in real estate and factors to consider when selling your  home within five years of purchasing it.

How Do I Know if the Five Year Rule Applies to Me?

When you buy and own a house, the general advice given to homeowners is that it will gain more value the longer it is owned by the same owner, particularly when the area that it resides in is growing or sought-after. This is known as appreciation, and it comes from a variety of factors that will influence each other when driving home values up. When a homeowner needs to sell their home in a pinch, determining whether the sale is worthwhile is a confusing task. This is typically where the five year rule comes into play.

Some common factors to keep in mind that will increase the value of a home include the following:

• Location of the house.
• Supply and demand of real estate in the area.
• Comparable properties nearby.
• The size and space that are usable in your house.
• Condition and age of your house.
• Updates and upgrades made to the house.
• Health of the economy/
• Walkability score.

A big factor when seeing if the five-year rule applies to you is the current appreciation rate for homes in your area.

What if I Have to Sell My Home Before the Five Years?

I spoke with Bob Jamison, Santa Clara County REALTOR for his advice: "Oftentimes, life happens and you need to relocate fewer than five years after purchasing a house, something that cannot always be avoided. There are options other than selling to help you continue to build up enough equity in your home before listing it on the market. A common option homeowners opt to do is to turn the house into a rental property. You can explore renting out your home for the long-term or as a short-term vacation rental to delay the sale of it while earning income from ownership."

Tax Implications for Selling Your Home As a Five Year Rule

Capital gains can be taxed from your home sale differently based on whether the property has been owned long-term or short-term. The distinction between the two will help differentiate average homeowners from investors. Homeowners usually sell their home to relocate or to upsize/downsize. Investors, on the other hand, tend to frequently buy and sell homes in a year for profit, which is considered a taxable income. Taxes on a home sale can be difficult for the average homeowner to understand, as the IRS treats your home as a capital asset subject to capital gains tax, meaning you owe taxes on profits made from the sale of your property if the home's value has increased. The IRS offers a capital gains tax exemption, but it will depend on how long you have owned the house for, how long it has been your primary residence, your filing status, and the amount of the profits earned from the sale.

How Much Will It Cost Me to Sell My Home Before the Five Year Rule?

If you purchased your home in the last five years, you might recall the costs associated with purchasing it, from inspection fees to closing costs. These are all costs that can quickly add up, and will factor into whether it is worth it to resell within five years, as most people who sell their home need to purchase a new one to reside in. To make the most bang for your buck on a home sale, it needs to have appreciated more than the sum of all the selling fees you will face when relocating. Costs will vary depending on the condition of your home, and the availability of homes for sale in the market. Common costs associated with selling your home include the following:

• Staging costs and fees to prep the house for showing.
• Commissions for your realtor.
• Inspection and repair fees.
• Closing fees.
• Seller concessions.
• Overlap costs.
• Moving and relocation costs.
• Mortgage payoff.

Partner Up With a Professional Agent to Evaluate the 5 Year Rule

When it comes time to sell or buy your next home, we recommend finding and partnering up with a top agent in your area. Homeowners have to consider their strategy for how they will get to their next house. From upsizing to relocating to downsize, a professional can help you put together a good plan to strategize how you are going to get your next move rolling. A professional can help you determine how long you want to live in a house before making a purchase, as there are plenty of benefits to following the five-year rule. Losing out on money when selling a home is never the goal, so ensure it is the right choice before signing on the dotted line.

Conclusion

If you are looking to sell your home and relocate, ask yourself where you want to be five to ten years from now. The five-year rule is a good guide for the average homeowner to help get the most out of where you currently live, and will give you the best return when the time comes to sell and move onto your next dream home.