Can You Sell a House After Only 1 Year?

Selling a house after only one year is possible, but it comes with distinct financial and tax implications that potential sellers should understand. While there are no legal prohibitions against selling a property quickly, the timing of the sale significantly affects the amount of profit you might retain and the taxes you could owe. Consider capital gains tax rules, potential exclusions, and other transactional costs to make an informed decision.

Understanding Capital Gains Tax

When you sell a home for more than you paid for it, the profit is a capital gain, which is subject to taxation. The Internal Revenue Service (IRS) distinguishes between short-term and long-term capital gains based on how long you owned the property. This distinction is relevant when selling a home within a year of purchase.

A short-term capital gain applies if you sell an asset, including real estate, that you have held for one year or less. These gains are taxed at your ordinary income tax rates, which can range from 10% to 37% depending on your income bracket. In contrast, a long-term capital gain applies to assets held for more than one year, and these gains are taxed at preferential rates, usually 0%, 15%, or 20%, depending on your taxable income. The holding period is determined by counting from the day after the closing date of purchase up to and including the closing date of sale.

Primary Residence Exclusion Rules

A tax benefit for homeowners is the Section 121 exclusion, which allows you to exclude capital gain from the sale of your primary residence. To qualify for the full exclusion, you must meet both an ownership test and a use test. You must have owned the home and used it as your main home for at least two out of the five years leading up to the sale.

If you sell your home after only one year, you generally will not qualify for the full primary residence exclusion of up to $250,000 for single filers or $500,000 for those married filing jointly. This means any profit you make from a quick sale is more likely to be subject to capital gains tax. There are limited exceptions to the two-year rule that may allow for a partial exclusion, such as a change in employment, health reasons, or other unforeseen circumstances.

Calculating Your Taxable Gain

To determine your taxable gain, you first need to calculate the adjusted basis of your home. This begins with your original purchase price and includes acquisition costs, such as legal fees, title insurance, recording fees, and transfer taxes. It also includes the cost of any capital improvements that add value or prolong the property’s useful life.

Next, you calculate the net sale price by taking the gross sale price and subtracting eligible selling expenses. These expenses can include real estate agent commissions, attorney fees, and other closing costs. The taxable gain is then found by subtracting your adjusted basis from this net sale price. After determining the gain, you would apply the appropriate short-term or long-term capital gains tax rate, considering any partial primary residence exclusion that might apply due to qualifying exceptions.

Other Financial Considerations

Beyond capital gains tax, selling a home involves other financial considerations that can impact your net proceeds. Real estate agent commissions are typically the largest selling cost, often ranging from 5% to 6% of the sale price. This percentage covers both the listing agent and the buyer’s agent.

Sellers also incur various closing costs, which can include title insurance, escrow fees, attorney fees, recording fees, and transfer taxes. These fees collectively can range from 1% to 3% of the sale price, though they vary by location. Additionally, if you have an outstanding mortgage, the loan balance will be paid off from the sale proceeds. In some cases, a mortgage may include a prepayment penalty if the loan is paid off within a specific timeframe, typically within the first few years of the loan.