What Happens If I Sell My House After 1 Year?

Selling a home can involve various financial considerations, especially when the sale occurs shortly after purchase. Understanding the potential financial impacts and tax implications is important for homeowners. This article explores the financial aspects that arise when a home is sold within approximately one year of its acquisition.

Understanding Capital Gains Tax for Short-Term Sales

When a home is sold, any profit realized is generally considered a capital gain. The Internal Revenue Service (IRS) categorizes capital gains based on the asset’s holding period. If a home is held for one year or less before being sold, any profit is classified as a short-term capital gain. This contrasts with long-term capital gains, which apply to assets held for more than one year.

A significant distinction between these two categories lies in their tax treatment. Short-term capital gains are taxed at ordinary income tax rates, which are the same rates applied to wages and other regular income. These rates can range from 10% to 37%, depending on an individual’s taxable income and filing status. In contrast, long-term capital gains often benefit from lower, preferential tax rates, typically 0%, 15%, or 20%.

Homeowners often consider the Section 121 exclusion, an IRS provision that allows a certain amount of gain from the sale of a principal residence to be excluded from taxable income. For an individual, this exclusion can be up to $250,000, and for married couples filing jointly, it can be up to $500,000. To qualify for the full exclusion, the homeowner must meet both an ownership test and a use test. This means the home must have been owned and used as the main residence for at least two years out of the five-year period ending on the date of sale.

Selling a home after only one year typically means that the homeowner will not meet the two-year occupancy requirement for the full Section 121 exclusion. Consequently, any gain realized from such a sale would generally be subject to short-term capital gains tax rates, as it would not qualify for the exclusion. While there are limited exceptions for a partial exclusion under unforeseen circumstances, the general rule is that the two-year test must be met.

Calculating Your Home Sale Gain or Loss

Determining the financial outcome of a home sale involves calculating the gain or loss. This calculation is based on two primary figures: the adjusted basis of the home and the amount realized from its sale. The adjusted basis represents the original cost of the home, plus certain additions.

The original purchase price forms the starting point for the adjusted basis. To this, eligible costs incurred during the purchase, such as certain closing costs paid by the buyer, are added. These can include survey fees, legal fees, title insurance premiums, and recording fees. Additionally, the cost of qualified home improvements that add to the home’s value, prolong its useful life, or adapt it to new uses, also increase the adjusted basis. Examples of such improvements include:
Adding a room
Remodeling a kitchen
Installing a new roof

The amount realized from the sale is derived from the selling price of the home. From this selling price, certain expenses incurred during the sale are subtracted. These selling expenses typically include real estate agent commissions, advertising costs, legal fees, escrow fees, and transfer taxes. The final gain or loss is then determined by subtracting the adjusted basis from the amount realized.

For instance, if a home was purchased for $300,000, and the buyer paid $5,000 in eligible closing costs and later invested $20,000 in qualified improvements, the adjusted basis would be $325,000. If the home then sold for $350,000, with $20,000 in selling expenses, the amount realized would be $330,000. In this scenario, the gain on the sale would be $5,000 ($330,000 amount realized – $325,000 adjusted basis). This calculated gain is what would be subject to capital gains tax if no exclusion applies.

Reporting Your Home Sale to the IRS

Regardless of whether a gain or loss is realized, the sale of a home generally needs to be reported to the IRS. The process often begins with receiving Form 1099-S, “Proceeds From Real Estate Transactions,” which is typically issued by the closing agent involved in the sale. This form reports the gross proceeds of the transaction to both the seller and the IRS.

The information from the home sale, including the calculated gain or loss, is then reported on specific IRS forms. Form 8949, “Sales and Other Dispositions of Capital Assets,” is used to list the details of the transaction, such as the description of the property, the dates of acquisition and sale, the selling price, and the cost basis.

After detailing the transaction on Form 8949, the totals are then carried over to Schedule D, “Capital Gains and Losses.” Schedule D is where the overall capital gains and losses for the tax year are summarized and calculated. For a home sale, both Form 8949 and Schedule D are integral parts of the tax return to ensure proper reporting of any taxable gain.

Other Financial Considerations When Selling Early

Beyond the direct tax implications, selling a home within a short timeframe, such as one year, involves several other financial considerations that can significantly impact the net proceeds received. One of the most substantial expenses is real estate agent commissions. These fees are typically a percentage of the home’s final sale price, commonly ranging from 5% to 6%, and are often split between the listing agent and the buyer’s agent. For a median-priced home, these commissions can amount to tens of thousands of dollars, directly reducing the seller’s cash from the sale.

In addition to commissions, sellers are responsible for various closing costs. These can include:
Transfer taxes, imposed by state or local governments for transferring property ownership.
Title-related expenses, such as a title search and owner’s title insurance.
Escrow fees, paid to the neutral third party handling funds and documents.
Attorney fees, if legal counsel is involved.
These closing costs can collectively range from approximately 1% to 3% of the sale price, though they can vary.

Prorated property taxes and any outstanding homeowner association (HOA) dues up to the settlement date are also typically paid by the seller at closing. Additionally, expenses associated with physically relocating, such as moving company fees, packing supplies, and temporary housing, are an additional financial outlay. These various costs reduce the total amount of money a seller ultimately receives from the transaction.