Deciding when to sell your home is a major decision that can be influenced by many factors—financial, personal, and market-driven. One of the most important considerations is: How long should you live in a house before selling?
While there’s no one-size-fits-all answer, understanding the potential financial benefits of staying in your home for a longer period can help you make a more informed decision.
Reasons you may need to sell your home
Deciding when to sell a home is a big financial decision, but for many, it doesn’t just come down to dollars and cents. More often, homeowners consider selling due to life circumstances, such as a new job, a growing family, or retirement, rather than just maximizing profit. Regardless of whether your motivation is financial or circumstantial, it’s important to consider how your tenure in a home will impact your personal finances.
How long should you live in your home before selling?
Arguably, the most important variables to consider before you make the decision to sell are home equity, transaction costs, and local market conditions.
Home equity
Home equity is a term that measures the value of a home to its owner after all debts and liabilities (like a mortgage) have been paid. As a simple example, if a house worth $440,000 has a single liability—a $300,000 mortgage—the equity value would be approximately $140,000 ($440,000 – $300,000).
There are generally three ways to increase your home equity: appreciation, home improvements, and amortization. Appreciation is the increase in property values over time due to broad macroeconomic forces. Home improvements are upgrades to a property that increases the resale value of the property. Amortization is a term that describes the gradual paydown of a mortgage through on-time monthly payments.
Generally speaking, the longer you live in a home, the more equity you’re likely to have. And when selling a home, more home equity often equals more flexibility you’ll have in timing the sale of your property.
Transaction costs
Transaction costs in real estate are the expenses associated with buying or selling a property. These costs can vary depending on the sale price and location of the property. When calculating the ideal time to sell your home, there are three categories of expenses you should consider.
1. Upfront costs
Upfront costs generally describe expenses incurred to make the property ready and optimized for sale. The costs and scope of these upfront costs will vary depending on the type and condition of your property, but some major costs to consider are pre-sale home inspections, making repairs or upgrades, home photography, and staging.
2. Closing costs
Closing costs refer to the fees and expenses associated with finalizing the sale of a home, typically paid at the closing of the transaction. These costs can include both mandatory fees, like title insurance and transfer taxes, and negotiable fees, such as seller concessions, where the seller agrees to contribute toward the buyer’s costs.
For most home sellers, closing costs include real estate agent commissions, which are typically a percentage of the final home sale price and exchanged during the final transaction at closing. Other closing costs will vary by state but often include title insurance, transfer taxes, escrow fees, attorney fees, and seller concessions.
3. Capital gains taxes
The profits generated from homeownership are taxable, but several strategies can be used to reduce your overall tax burden. By owning a property for at least one year, any profits will be taxed as long-term capital gains—which can be lower than ordinary income tax rates, depending on your tax bracket.
The second tax law to consider is that homeowners who live in a primary residence for two of the last five years prior to the sale of the property are exempt from capital gains taxes. This is a strong reason for homeowners to try to stay in their homes for a minimum of two years.
So, how long should you live in a house before selling to minimize taxes? If you meet the two-year requirement, you could avoid capital gains taxes, which is a significant benefit.
Before determining when to sell your property, you should estimate what your closing costs will be. Because costs will vary by location and property, you should consider speaking with a qualified real estate agent before making a decision about when to sell your home. Why? An agent can help you determine the appropriate level of improvements to make to your property and help you estimate your total upfront and closing costs.
Local market conditions
Although the US housing market is quite stable, there can be short-term and seasonal fluctuations in local market conditions. These fluctuations come from changes in supply and demand.
When there are more buyers than properties for sale on the market, it’s considered a “seller’s market”—where sellers generally have more negotiating power over price and concessions. Conversely, when there are more sellers than buyers in a market, it’s a “buyer’s market,” and sellers have less leverage in their sales process.
While it’s difficult to time the market perfectly, it is beneficial to sell into a seller’s (or at least a neutral) market. Even if you can’t wait to sell, you should be aware of local market conditions before listing your property to ensure you have appropriate expectations for your sales process. Using Redfin’s Data Center can help you identify trends in your local market or talk to a qualified real estate agent to help you understand market conditions and determine the best strategy for listing your property.
Remember, national housing market conditions are not always indicative of what’s happening in your local market. It’s crucial to know what’s happening in your own backyard before making a decision as big as this one.
The five-year rule
The ideal timeline to sell a home will vary considerably based on your personal financial situation, as well as the characteristics of your home and local market. However, as a rule of thumb, homeowners wanting to maximize financial gains should wait at least five years to sell. This time frame allows you to grow home equity through appreciation and amortization sufficiently enough to offset the transaction costs of a sale.
How waiting to sell can maximize your home’s value: A $400,000 example
Using an example of a home purchased for $400,000, we can see how waiting a few years to sell your home has big benefits. For this example, we’ll assume this property is purchased with a 20% down payment, has a 6.75% mortgage rate, and experienced average market appreciation of 3.5% per year.
Even though our example assumes immediate property value growth, the homeowner would lose money if they were to sell in either of the first two years. Such a short tenure in a home doesn’t allow the homeowner to build up enough equity through amortization and appreciation to offset the transactions—which, in this case, would be around $35,000 to $40,000.
Fortunately, the numbers get much better after the first two years. In the third year, a home seller would make a modest profit, and the returns look better in each subsequent year.
Although this example breaks even at three years of homeownership, this assumes consistent growth similar to historical norms. In the name of caution, the five-year rule would help offset any chances of short-term market volatility that would negatively impact you.
How to estimate your home sale proceeds
The exact proceeds you will make from selling your home will largely depend on your personal circumstances. If you want to estimate how much you’ll make from selling your home, there are three simple steps:
- Estimate the current value of your home using Redfin and by talking to a local agent.
- Calculate your home equity. For most homeowners, this can be done by taking the current value of your home and subtracting your mortgage balance.
- Subtract your estimated selling costs.
For example, if you own a home worth approximately $360,000 and owe $215,000 on your mortgage, your home equity should be around $145,000. With sales costs estimated around 8%, you would subtract $28,800 ($360,000 * 8%) from your home equity and get estimated proceeds of $116,200.
Options to avoid selling early
For most homeowners, it makes sense to own a property for at least five years before selling, but some homeowners may face pressure to sell earlier. If you’re considering selling now but want to avoid selling early, you could consider renting out your property or renovating it.
Renting your home
Renting out your home can be a great way to build equity and generate income through cash flow. Becoming a housing provider does require some education, but it’s not rocket science. BiggerPockets has loads of free resources to teach you how to rent out your home and has even put together a free calculator you can use to determine whether selling or renting your home is a better financial decision.
Renovating your home
If you want to move due to life circumstances, like a growing family or need different characteristics in your living space, consider renovating your home instead of selling. Renovations do take some work, money, and time, but can be a great way to build equity in your home and forgo the transaction costs of selling your property.
Deciding the best time to sell your home: The bottom line
From a strictly financial perspective, you should plan to live in a house for at least five years, and the longer you wait, the better. Living in a property for a long time allows you to build home equity through appreciation and amortization, offsetting the potential costs of selling your home.
However, this decision is not always purely financial, and homeowners should take their time and educate themselves before making the decision. Research local market conditions, talk to a real estate agent, estimate your sales proceeds, and consider your lifestyle before deciding when to list your home for sale.
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