by Christy Bieber | Published on July 25, 2021
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Buying a home for just a short time could be an expensive mistake.
If you're thinking now is a good time to buy a home, it's important to make sure you are content to stay there a while. In fact, you should make certain that you're likely to remain on the property for a minimum of two to five years.
If you aren't sure that's the case, then there are two big reasons why you may be better off renting a property rather than purchasing one. Read on to see what they are.
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And selling a home can be even costlier. In fact, when you sell a property, you could be forced to spend up to 6% of the home's value on commission fees split between a buyer's real estate agent and a seller's agent.
Because of the high costs associated with any real estate transaction, you could end up losing a lot of money on your transactions unless you've stayed in your house a while. Hopefully, once you've been in your home for a few years, property values would have risen enough so you can sell at a little profit and cover all of these upfront expenses.
There's also another potential issue, depending on the size of your down payment. If you sell too quickly after buying, it's possible that you wouldn't be able to get a high enough price to pay off your mortgage and the transaction costs.
This is especially true because many mortgage loans tend to be structured so you pay mostly interest up front and your principal balance doesn't decline very fast.
Sometimes, it's actually possible to sell a property at a profit after just a short time -- especially if the housing market in your area is hot.
Unfortunately, if you haven't owned your house and lived in it for at least two of the past five years, you'll miss out on the favorable capital gains tax rules that can apply to real estate.
See, you can exclude up to $250,000 in gains (or $500,000 for married joint filers), which means the IRS wouldn't take its cut of that money. But you can only do that if you've owned the house for a long enough time.
If you sell your house after only owning it for less than a year, you could be subject to short-term capital gains taxes on any profits you make and wouldn't get this exclusion. The short-term capital gains tax rate is your ordinary income tax rate. The long-term rate, which applies after a year and a day of asset ownership, is lower for most people -- but obviously, you could still end up paying more if you don't qualify for the exclusion because you haven't owned and lived in the property for at least two of the past five years.
You don't want to end up with a big tax bill or with huge out-of-pocket transaction costs you can't pay just because you bought a home and sold it too soon. So before you make a purchase, think seriously about whether you plan to stay put for a while. If you don't, then renting may be the better financial choice in the short term.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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