Knowing when to buy, hold and sell property is the key to making a fortune in real estate. For homeowners, however, making a home purchase or sale decision is complicated by the fact that the investment involved is also the place you will call home.
To further complicate matters, timing your real estate transaction may be governed by factors beyond your control. Your boss could issue transfer orders at a time when the market is soft. It might not be the best time to sell. Or you could be expecting and discover that you’re going to have twins. Before you know it, your two-bedroom home is too small so you decide to move. Perhaps the market is hot and you’ll have no trouble selling. But, because the market is hot, you’ll pay a premium for your replacement home.
The real estate market, like any market, tends to be cyclical. Ideally, you want to buy when the market is low and sell when the market is high. Recently, the real estate market in many areas around the country has been on an upward trend, with record sales volumes and appreciation rates running in the double digits in some areas. But, the market won’t go up indefinitely. At some point, it will cool off.
It’s usually recommended to plan on holding real estate for 5-10 years. This way you can ride out a dip in the market and sell when the market is on an upswing. However, after a couple of years of appreciation in the 10 to 20 percent range, it’s tempting to sell and take the profit.
Before you make such a move, consider the following. Currently, the federal law governing capital gains on primary residences is a boon to homeowners who experience a lot of appreciation in a short time period. Once every two years, a homeowner who sells a primary residence is entitled to claim up to $250,000 of tax-fee gain. The exemption amount jumps to $500,000 for a married couple filing jointly. That is, providing that the homeowner has claimed the property as his primary residence for two of the last five years.
So, regardless of the recent appreciation rate, it usually makes sense to postpone a move until you’ve passed the two-year holding period. Check with your accountant if you’re transferred before you reach the two-year deadline. You may be entitled to a portion of the tax-free gain exemption.
Another factor to consider if you’re thinking of selling relatively soon after buying is the costs of sale. There are costs going in and costs when you sell. You may have earned good appreciation in a short time period. But, when you factor in the costs of sale, you may find that you barely break even. Unless you’ve found a great property that better suits your long-term needs, or you’re paying a discounted price on the new place, you may be better off staying put.
Market value issues can affect the feasibility of a profitable sale for owners who bought relatively recently. After only a short period of ownership, the market may not support a price that’s high enough to pay off your mortgage and cover closing costs. In a down market, you may have to dip into savings to make up the difference between the selling price and your costs of sale.
THE CLOSING: Even if you find a buyer who’s willing to pay a high price for your home, you may have trouble getting it appraised for the price. The sale could be in jeopardy if there aren’t any comparable sales in the neighborhood to support your high selling price.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers,” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.
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