Selling a House Within a Year of Purchase: What You Need to Know
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by Richard Morrison
- January 1, 2020
- Selling
- 0
Selling a home shortly after buying it is a bold move that can pay off or lead to financial losses. This guide examines the implications of selling within 12 months, from tax penalties and extra fees to overcoming buyer wariness.
Key Takeaways
- Expect to pay mortgage prepayment penalties and potentially capital gains taxes.
- Double closing costs like commissions and land transfer taxes eat into profits.
- Buyers may suspect issues with quick resales, so price competitively.
- Consider alternatives like renting out the property to recoup costs.
- Work with an experienced real estate agent to maximize sale price.
Selling so soon after purchase is rare, but sometimes life circumstances necessitate it. Here’s what to expect if you’re considering a quick resale in Canada.
Mortgage Prepayment Penalties Are Almost Guaranteed
Most mortgages have restrictions on prepaying or breaking your term early. Expect to pay stiff penalties if selling before the maturity date.
In BC, penalties can range from 3 months’ interest to the full interest rate differential (IRD). The IRD ensures the lender recoups interest they would’ve earned at your contracted rate for the remainder of the term.
On a $500,000 mortgage, you may face over $15,000 in prepayment charges. Ouch! Read mortgage terms closely and shop around for lower penalty options.
Capital Gains Taxes Apply on Investment Properties
While principal residences avoid capital gains in Canada, investment properties do not.
If selling an investment or secondary home within a year, you’ll owe capital gains tax on 50% of your profits . At a 50% inclusion rate in Ontario, a $100,000 gain equals $25,000 in capital gains tax .
Even if you sell at a loss, you must report capital losses on your tax return to reduce tax liability . Consult an accountant to maximize tax savings.
Buyers Beware of Potential Issues
Buyers will dig into the sale history and grow wary of quick flips. They’ll suspect:
- Structural or mechanical issues
- Shoddy renovations or unauthorized changes
- Neighborhood changes or construction noise
- Financial struggles forcing a quick sale
Provide a reasonable explanation for selling. Use an inspection report to assuage concerns over the home’s condition. Price competitively and prepare for closer scrutiny.
Double Closing Costs Eat Into Profits
Selling too soon after buying means paying closing costs twice :
- Realtor commissions (up to 6% of sale price)
- Legal fees ($1000+)
- Land transfer taxes (up to 5% of value)
- Moving costs, prep, and staging
On a $700,000 home, you may pay up to $49,000 in total closing costs. Not great for profits!
Consider Renting Out the Property
If selling at a loss, renting out the home can generate income while waiting for values to rise .
Aim to charge enough in rent to cover the mortgage, taxes, and maintenance. Screen tenants thoroughly – problem renters can sink your plan!
With Toronto rents up 26% in 2022, renting is worth considering . Take advantage of low vacancy rates.
Work Closely With an Experienced Real Estate Agent
Selling a newly purchased home takes expertise. I advise clients to work with a realtor who specializes in quick resales .
Look for an agent with experience in:
- Accurately pricing fast-sale homes
- Developing marketing to overcome buyer doubts
- Advising on disclosures and paperwork
- Negotiating strategically to maximize sale proceeds
Vet agent experience – 10-20 similar deals is ideal. This is not the time for rookies!
The Bottom Line
Selling a home under a year of purchase is risky but can pay off. Understand the costs and taxes involved. Price competitively and hire an expert agent to maximize your net proceeds and overcome buyer hesitations.
Have you sold a home quickly after buying? Share your experiences and advice below!
FAQs:
Q: What do I need to know if I’m selling a house within a year of purchase?
A: If you’re selling a house within one year of purchase, you could be subject to capital gains taxes. Homeowners who sell their house after owning it for 1 year or less may be liable for short-term capital gains taxes on the profits earned from selling the home. It is important to understand that when buying and selling a house within a year or less, you may have to pay tax on the sale.
Q: What should I do if I want to avoid capital gains when selling my house after 1 year or less?
A: If you are looking to avoid paying capital gains when selling your house after 1 year or less, you might want to consider consulting with an advisor and seeing if there are exemptions available that would allow you to be exempt from capital gains. Additionally, it’s important to determine the current market value of your home so that if applicable, you can accurately calculate any taxable capital gains.
Q: How do I determine the market value of my home before I sell it after one year or less?
A: The best way to determine your home’s market value is by hiring a real estate broker or agent who will conduct a comparative market analysis (CMA). This will help provide an accurate assessment of how much your property is worth in today’s real estate market.
Q: Can I still sell my house after just one year without being subject to capital gains?
A: Yes, as long as you’ve lived in the home for at least two out of five years prior to sale. Generally speaking, homeowners can sell their house without being subject to capital gains as long as they have owned and lived in the home for at least two out of five years prior to sale. However, this only applies if they meet certain criteria.
Q: What costs should I expect when selling a house after one year?
A: When it comes time for selling a house after one year, homeowners should expect various costs associated with buying and/or selling property such as closing costs, fees related to listing and advertising the property, legal fees or title insurance premiums. Additionally, homeowners should also account for any property taxes that may be due upon completion of the sale.
Q: Are there special considerations if I am an investor buying and then quickly reselling a property?
A: Yes. Real estate investors who buy and then quickly resell properties within one year are often considered “traders” by tax authorities and may be subject to different rules regarding taxation of any profits made from these types of transactions.
Q: Is there anything else I need to think about before deciding whether or not to sell my home after owning it for just one year?
A: Yes – potential buyers may be hesitant about buying a home which has been owned by its previous owner for only 1 year or less. Therefore, homeowners looking at potentially selling their home after owning it for just one year might want consider talking with their realtor about strategies which might make potential buyers more comfortable with making an offer on their property.
Q: Can I sell my home within a year or less without having any tax implications?
A: Generally speaking no – unless certain criteria are met (such as living in the home for two out of five years prior) homeowners who own their homes for 1 year or less will likely have some sort of tax implications associated with them when they decide to sell. It’s important that you consult with an advisor before making decisions regarding taxation related matters.
Conclusion:
Selling a house within a year of purchase can be a stressful and financially challenging decision. When you sell your home after less than a year, it is rare to make a profit. In fact, you may even lose money or break even, as there are several costs associated with selling a property. One of the biggest drawbacks of selling a house after less than a year is the need to pay capital gains tax.
If you sell your primary residence within a year of buying it, you may be required to pay this tax, which could significantly reduce any potential profit you may have made. Additionally, real estate commissions can also eat into the final sale price, lowering the amount of money you can make on the sale.
There are alternatives to selling your home if you find yourself needing to move or relocate within a year of buying a house.
Renting out your property, for example, can provide some additional income while allowing the value of your home to potentially increase over time. However, it is important to consider the costs associated with being a landlord, such as maintenance and mortgage payments, before making this decision.
If selling your home is still the best option for you, it is crucial to be aware of the potential consequences. For instance, buyers will know that you have only owned the home for a short period of time, which may make them more cautious and skeptical about the property.
They might wonder if something is wrong with the property or if you are trying to sell it for a higher price due to unforeseen issues.
Furthermore, when you sell a property within a short time frame, any gain you make on the sale must be reported to CRA.
The profit you make, if any, may be subject to capital gains tax, further reducing your overall earnings. It is important to consult with a tax professional or mortgage broker to understand the financial implications of selling your home after less than a year.
Ultimately, selling a house within a year of purchase can be a complex decision. While it may be necessitated by the need to relocate or other life circumstances, it is crucial to consider the costs associated with the selling process and potential setbacks that may arise. Assessing alternatives to selling, such as renting out the property, can also be a viable option to consider before making a final decision.
Ready to turn your real estate dreams into reality? Contact Richard Morrison, Vancouver’s top realtor with 20+ years of experience. As a Medallion Club member and RE/MAX Hall of Fame award winning agent, he’s the expert you need on your side. Whether buying, selling, or investing, Richard’s personalized approach and deep market insights ensure a successful transaction. Reach out to Richard today at (778) 900-2235 and make your real estate journey seamless and rewarding.
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