Penalty For Selling a House Before 2 Years

There is no direct penalty for selling a house before 2 years. But you must be aware of tax penalties in the form of short- or long-term capital gains tax If you are planning to sell a house. It is more important to understand the possible tax implications of selling a house before 2 years. You might have heard about the capital gains tax exemption on property selling after 2 years. However, you will need to pay short-term capital gains tax if you sell the property within 2 years of owning it.

What is the penalty for selling a house before 2 years?

You must pay a long-term or short-term capital gain tax penalty if you sell your house before 2 years. If you sell the property within a year, you will have to pay a short-term capital gains tax penalty, which could be as high as 37%, depending on your income. If you have owned the home for more than a year but less than two years, you will pay a long-term capital gains tax penalty, which could be 0%, 15%, or 20%, depending on your income level.

Note: All tax rates and rules in this article are based on January 2025. It may change in the future. You can consult your tax advisor before taking any financial decision.

Let us see possible tax penalties in detail when you sell the property before have owned it for two years.

Penalty For Selling a House Before 2 Years

What Happens if sell the house before 2 years?

If you sell your house before owning it for 2 years and make a profit, you might have to pay a tax penalty. The amount of the penalty will depend on how long you owned the home and your tax bracket. You can get the benefit of primary residence exclusion as well if the property you are selling is your primary residence.

But first, you need to understand what capital gains tax is.

What is capital gains tax?

You need to pay capital gains tax when you sell assets like a home, stock, or other investments and make a profit.

There are two types of capital gains taxes based on how long you have owned the property and your income level.

Short-term capital gains tax: You must pay short-term capital gains tax if you sell a house you have owned for less than a year. The rate of the short-term tax penalty depends on your level of income, which could be as high as 37%.
- Example: Suppose you purchase a house for $350,000 and sell it after 9 months for $450,000. Your profit of $100,000 will be considered a short-term gain as you owned it for less than a year. Now if you are in the 24% ordinary tax bracket, then you need to pay $24,000 in short-term capital gains tax.
Long-term capital gains tax: You must pay long-term capital gains tax if you sell a house after owning it for more than a year. The rate of long-term tax penalty depends on your level of income and long-term capital gain tax bracket, which could be 0%, 15%, or 20%.
- Example: Let us say you purchase a house for $350,000 and sell it after 15 months for $450,000, making a profit of $100,000. Your gain will be considered a long-term gain as you have owned it for more than a year. You will pay $0 in taxes if you are in the 0% long-term capital gains rate, $15,000 if you are in the 15% rate, and $20,000 if you are in the 20% rate.

In both these cases, you need to pay a tax penalty if you sell a home before 2 years and not in a 0% tax bracket.

You can read about How to Start Saving For a House

Partial exclusion for certain circumstances

You can get partial exclusions from taxes in case you sell a house within 2 years in certain circumstances, like job relocation or any health-related reasons, which are subject to passing the ownership and use tests.

Pros and cons of selling a house before 2 years

There are several advantages and disadvantages of selling a home before 2 years.

Pros

Market Conditions: If you are selling your home in the seller’s market then you may get better value on your property.
Access to Cash: If you need funds for any life event or other investment options then you can get quick cash by selling your house.
Avoiding Maintenance Costs: If you are facing repair costs of a house then you can sell it early to avoid maintenance costs.
Relocating for lifestyle change: If you are looking for lifestyle change by moving to another location then you can sell it to move to a new location.

Cons

Capital Gains Taxes: You can exclude up to $250,000 in capital gains from taxes if you sell it after 2 years. You need to pay capital gains tax if you sell it before 2 years.
Transaction Costs: You need to pay for estate commissions, closing costs, repairs, and staging costs that can reduce your profit.
Low profit in a down market: If you are selling a home in a down market, then you may get a lower profit.
Emotional Attachment: We have an emotional attachment to our home and neighborhood. Selling a house means you are losing your emotions as well with the house sale.

Should You Sell House Before Two Years?

It is advisable to not sell a house before 2 years to avoid potential tax penalty consequences if your finances allow it. You can consult your tax advisor to find a way other than selling a house. Selling a house before 2 years is not a profitable business anyway.

Here are a few alternatives you can consider to avoid selling a house.

Rent a home

You can rent your home to get rental income, and property appreciation over time, and still, you can hold onto the property.

Lease-to-own

You can rent your home with a lease-to-own agreement to get a rent and sell it down the line.

Home swap

You can try swapping a home with someone else. Nowadays several platforms like homeexchange provide home swapping services.

Rent portion of the house

You can rent a portion of your house, like an extra room or basement area, to earn rent and own and live in your own home.

Refinancing

You can consider home refinancing options with more favorable terms and interest rates.

Key Takeaways

Selling a house has more disadvantages than advantages. You need to pay capital gains tax penalty and other costs that will reduce your profit if you are not eligible for partial exclusion. It is advisable to consider the pros and cons and take advice from experts before selling a home to avoid any surprises.

How do I avoid capital gains if I sell before 2 years?

Practically there is no way to avoid capital gains tax if you are selling a house before 2 years. However, you can get a partial exclusion from tax for certain circumstances like moving to another location for health-related reasons or job relocation.

What is it called when you sell your house before 2 years?

You need to pay short-term capital gain tax if sell a house before 1 year and long-term capital gain tax if sell before 2 years.

What happens if you sell a house within 1 year?

You must pay short-term capital gain tax as per your ordinary tax bracket(i.e. 10%, 12%, 22%, 24%, etc.) if you sell your house within one year.

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Prakash

Prakash is a personal finance enthusiast dedicated to helping you save more, invest smarter, and find new ways to earn money. With a passion for financial freedom, Prakash shares practical tips and proven strategies to take control of your money and build a secure future. Follow along for actionable advice on saving, investing, and making money work for you!