What Is the 5-Year Rule for Selling a House? There Are Actually Two (2024)

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What if I need to sell my home before five years?

Sometimes the need to relocate fewer than five years after purchasing a home cannot be avoided. Life happens, but there are options other than selling to help you build up enough equity in your home before putting it on the market.

A common option for people who do not yet want to sell their home before owning it for five years is to turn it into a rental property. You can explore renting it out for the long-term or as a short-term vacation rental to delay selling it while still earning income from ownership.

Vacation homes do well in states like Studebaker’s market, which is in a year-round warm part of the country. “Unlike some of the cold weather states, we have a lot of vacation rentals here,” Studebaker says. “So right now in Arizona it’s 65 degrees and sunny, but in the Midwest, it’s snowing, and in the northwest, it’s raining. Those folks are coming here to enjoy our winter weather.”

The other 5-year rule: Tax implications for selling your home

The IRS taxes capital gains from a home sale differently based on whether the property has been owned long-term or short-term. This distinction helps differentiate average homeowners from investors. Average homeowners typically sell their homes to relocate, upsize, or downsize. Investors, on the other hand, frequently buy and sell homes within a year for profit, which is considered taxable income.

Understanding taxes on a home sale can be complex for most people, as the IRS treats your home as a capital asset subject to capital gains tax. This means you may owe taxes on any profit from the sale if your home’s value has increased. However, there are potential capital gains exemptions available, making the five-year rule beneficial for homeowners who adhere to it.

The IRS offers a capital gains tax exclusion, but it depends on how long you owned the home, how long it was your primary residence, your filing status, and the amount of the profits you earned from the sale.

You must have lived in the home as a principal residence for any two of the five years before selling. If that condition is satisfied, up to $250,000 of profit is typically considered tax free if you’re a single filer, or up to $500,000 if you are married and filing jointly. Profits exceeding these thresholds generally must be reported as a capital gain and are subject to taxation. For personalized advice on your specific situation, consult with a tax professional.

In a market where there are fewer homes available for sale — a seller’s market — increased demand can drive sale prices above the list price, potentially resulting in larger profits for homeowners. In a seller’s market, being knowledgeable on the tax implications is more important than ever.

“What we’re looking at is an extreme shortage of inventory,” Studebaker says. “Supply and demand is driving the home prices up significantly, and we don’t see that changing for at least the next three years. It could be as long as five years before we see a change in inventory.”

Testing the 5-year rule: How much does it cost to sell my home?

If you’ve purchased a home within the past five years, you may remember the costs associated with purchasing it, from inspection fees to closing costs. These costs can add up, and will also factor into whether it’s worth it to resell within five years, since most people who sell their home often need to purchase a new one to live in. To make money on your home sale, it needs to have appreciated in value more than the sum of all the selling fees you will face when moving.

Your costs will vary depending on the condition of your home, and the availability of homes for sale in the market in which people are buying.

Common costs associated with selling your home include:

• Staging fees and costs to prep the house for showing (varies)
• Realtor commissions for the sale (5% to 6% is standard, but this may change)
• Inspection and repair fees (varies)
• Closing fees to sell, which include title fees, transfer taxes, escrow fees, recording fees, and prorated property taxes (1% to 3% of the sale price)
• A possible second set of closing costs if buying a new home
• Seller concessions (2% to 6%)
• Overlap costs (1% to 2%)
• Moving and relocation costs (varies)
• Mortgage payoff (varies)

Beating the 5-year rule: Get experts involved

“One of the things that homeowners need to think about is what your strategy will be on how you’re going to get to the next house,” Studebaker says. “Some people are upsizing, some people are relocating, some people are downsizing. They really need to get with a professional and put together a plan, because with inventory as low as it is, you need to have a strategy on how you’re going to make that next move.”

Consulting your CPA or tax professional is crucial when considering selling your home within five years of purchase. A tax professional familiar with your financial circ*mstances can provide invaluable insights into whether selling would be advantageous or lead to additional expenses.

It’s important to think about how long you want to live in a house before you make a purchase, because there are many benefits to following the five-year rule. Losing money on a home purchase is never the goal, so make sure it’s the right choice before signing on the dotted line.

Partner with an experienced agent to truly evaluate the 5-year rule

When it’s time to buy your next home, use HomeLight’s Agent Match tool to find and partner with a top agent. No matter how long you have lived in your home, our data shows that the top 5% of real estate agents across the US sell homes for as much as 10% more than the average agent.

If you are looking to sell your home and relocate, ask yourself where you want to be five or 10 years from now. Ultimately, the five-year rule is a good guide for the average homeowner to help get the most out of where you live now, and will give you the best return when the time comes to sell and move on to your next home.

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