Answer This Question Before You Even Think About Buying a Home

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Don't start looking at real estate listings unless you've thought about this.

If you're considering buying a home, there's one key question you need to ask before you pull the trigger: How long do you plan to stay in the property?

It's an important question because unless you intend to remain in the home for at least three years (and preferably longer), renting is almost always the better option. Here's why.

Buying a home doesn't make sense if you'll be moving soon

If you have a short timeline before you have to move again, buying a home isn't the smartest course of action. That's because real estate transactions can be expensive.

Ideally, your property will appreciate (go up) enough in value that you can make up for the costs you'll pay when you close on the house. But that takes a few years to happen.

As both a buyer and a seller, you'll likely face closing costs totaling several thousand dollars. As a buyer, you'll owe them when you close on your mortgage and the property is transferred to you. And you'll owe them as a seller when you transfer the property to a new owner. Closing costs can include things like transfer taxes, title insurance, and fees paid to the title company that processes the transaction.

When you're selling your home, you'll also have to pay commission to both your own real estate agent (if you use one) and the agent representing the person buying your home.

The standard real estate commission is 6%, split between the buyer's agent and the seller's agent. It may be possible to reduce this by offering a smaller buyer's agent commission or listing the property for sale on your own. But it's rare not to have to pay some amount to a buyer's agent. After all, most people who purchase properties do hire a real estate professional to help them. Their agent may steer them away from your home if you won't pay the customary fee.

With all of these costs, you'd have to sell your home for a lot more than you paid for it just to break even. And it usually takes at least a few years for your property to increase enough in value for that to be feasible.

You'll also have capital gains taxes to think about. (When you sell a house for a profit, it's

known as a capital gain.) If you've sold your property at a profit, you can avoid capital gains taxes on $250,000 of gains as a single person or $500,000 as a married person. But that's only true if the home is your primary residence and you've lived in it for at least two of the five years before the sale. If you sell your home before two years have passed, this exclusion from capital gains taxes won't apply to you.

All of this means that you will probably lose money if you buy a home and try to turn around and sell it quickly. And if you're lucky enough to get a different outcome and actually make money, you'll owe the IRS a bigger piece of it. Rather than risking losses, ask yourself if you're content to stay put for a bit -- and don't buy a home if the answer is no.

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