How Soon Should You Sell Your Home After Purchasing It In Ottawa?

It can be costly to sell too quickly.

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Very few houses turn into homes forever. Statistics indicate that homeowners tend to sell homes after 5 to 8 years they bought them. However, things don’t always go as planned in life. Some people find themselves in the position of having to sell their homes shortly after purchasing them. 

Whether you need to transfer for work to some foreign location (lucky you!), are divorcing (sorry!), have discovered unanticipated (and costly) difficulties, or simply don’t like your house anymore, you will probably be asking yourself, “How early can I sell my home?” 

The answer is that you can sell your home the day after you buy it. However, selling your property shortly after purchasing it can result in a loss of money, missed opportunities, capital gains taxes, or mortgage prepayment penalties. Unless you work with a high-performing real estate company in Ottawa like Labrosse Real Estate, you’ll likely pay around 10% in closing costs. Here’s what you need to know about selling a house after one year, and how to protect yourself financially if you do.

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Selling a House After One Year or Earlier

While there may be compelling reasons to sell your house soon after purchase, you should be aware that doing so might result in financial losses. You spent closing expenses when you bought the house, which you won’t be able to return unless you develop an equity or the house appreciates in value. There are also fees related to selling and moving to consider.

Also, do calculate what’s known as the breakeven point before you consider selling. 

What is Breakeven Point?

The breakeven point is the point at which you may anticipate selling your home and repay all of your initial investment. Housing prices tend to climb in a normal market, and you’ll earn equity as you pay down your mortgage, offsetting the costs of ownership as well as purchasing and selling transaction costs.

While the breakeven point varies by area and fluctuates with mortgage rates, it’s important to calculate it as closely as you can if you must sell soon after buying. 

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Risks Involved in Selling a House Soon After Buying It

There are various risks involved in selling a house soon after buying it. Before you call a broker and advertise the place for sale, read this article to learn about the risks of selling your home early. We’ll go over how to sell your property and what challenges you can encounter before, during, and after the sale.

 

1. Mortgage prepayment penalties

When buying a property, a borrower and a lender enter into an important contract known as a mortgage loan. This contract has various limitations, some of which can be violated if the owners sell their home soon after acquisition. 

Some banks and mortgage lenders have clauses in their contracts that state that a homeowner cannot sell their home within a particular amount of time after purchase. There are numerous mortgage lenders who prefer to write it into the contract that a homeowner cannot sell the house within a time frame after purchase. 

Sometimes these regulations are included in the contract as the mortgage lenders don’t want to miss out on interest payments they would have received for years to come. 

A mortgage prepayment penalty applies to homeowners who sell their homes before they are legally authorized to do so under their existing mortgage arrangement. This fee varies based on how the mortgage lender calculates the fine, but it often ranges from 2 to 5% of the remaining loan balance.

 If you are a new homeowner who has not paid much in property taxes, this can be a significant number. Individuals who purchased a $500,000 property with a 5% down payment may be required to pay $23,750 in mortgage penalties. 

Although time-limit restrictions in mortgage contracts are uncommon, they might be added to any mortgage arrangement. Homeowners should consult an expert Ottawa realtor to understand their home loan documents carefully before listing their homes for sale, or they could lose a lot of money. 

2. Sellers Are Required to Give Valid Reasons for Listing Early

While many sellers would like to conceal their home’s early sales, it’s impossible. Individuals, couples, and families that engage with a real estate agent will know when and how much the house was previously purchased. This implies that potential buyers will be aware of anyone attempting to sell the house earlier than what their agreement allows, as well as the price they paid for it.

Due to the recent acquisition and early selling, many potential buyers may even reconsider purchasing a house. They are more inclined to assume that something is amiss with the property if it is for sale in the same year that it was purchased. Sellers will require a compelling story and, in some situations, a report on the property’s condition to ensure that the home is in good condition. 

A realtor, on the other hand, will be familiar with the home’s initial purchase price. This means that unless some renovations have been performed or the market has changed and the property worth has grown, it will be very impossible to increase the asking price. It’s improbable that you’ll sell your property for more money than you paid for it unless you’re one of the lucky few. 

3. Sellers are Likely to Lose Money on Extra Fees

Selling a home, like buying one, may be pricey. Both buyers and sellers must engage a broker and a real estate attorney, as well as pay taxes. The expenses incurred throughout the selling process can quickly add up, especially for individuals who are selling their homes at a loss. Land transfer taxes, legal fees, realtor fees, and other associated selling costs must be paid by those who sell their home.

Due to the closing fees connected with selling a home in the same year that it was purchased, people almost always lose money if they sell early.

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4. Sellers have to pay Capital Gains Tax

When a home is about to be sold, the seller must calculate how much tax on capital gains they will owe. In Canada, capital gains are one of the three types of revenue. It’s the profit you make when you sell an item or assets that have appreciated in value throughout the time you’ve owned them. Homes, businesses, antique sports cars, and other assets are instances of taxable capital gains. According to the law, sellers must pay tax on 50% of their capital gains, with the percentage fluctuating depending on the circumstances. 

Because of the primary residence exemption under the Canada Income Tax Act, many sellers don’t have to pay capital gains tax. However, numerous media claim that the Canadian government is considering repealing this tax measure and requiring sellers to pay capital gains tax on all homes sold, not just second homes.

 Despite the fact that this modification is being considered, it has not yet been formally implemented. This means that they can avoid paying capital gains tax when they are selling their residence. Investors in real estate aren’t as fortunate as primary homeowners.

Real estate investors are not excluded from capital gains taxes, thus they must pay taxes on the sale of their second homes. This means that investment properties sold less than a year or a few years after they were purchased are still subject to capital gains tax. 

The tax rate is calculated using the purchase price of the investment property, the sale price, any selling expenditures, and the seller’s income. Sellers might expect to pay capital gains tax if the property is sold for only a little more than it was originally purchased for. Sellers who do not earn a profit on their investment property will suffer capital losses or a reduction in their net worth.

When submitting a tax return, those who bore capital losses should obtain advice from a tax expert when filing their tax return. Capital losses must be declared on a tax return because they impact a person’s tax burden and can be used to lower taxable capital gains for a period of three years. While a person may have lost money by selling their property, they may be able to use that loss to avoid paying additional taxes in the future.

5. Choose Your Real Estate Agent Wisely

Homeowners who sell their property less than a year after purchasing it are practically certain to lose money. As a result, it’s critical for sellers to seek ways to save closing costs wherever they can.

Hiring a low-cost real estate agent like Labrosse Realty is a terrific method to cut down on selling costs. The commission fees charged by real estate agents in Ottawa are typically 6% of the home’s sale price. If you sell a home not long after purchasing it, this might soon pile up. 

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Low-cost brokerages might charge as little as 1% commission for their services. This means that instead of paying $30,000 to sell a $500,000 home, sellers would just have to spend $5,000.

Rent instead of selling

There are other alternatives to selling a new home and taking a financial hit. Sellers could always use their house as a rental property for several years. This would allow homeowners to wait for their home’s property and market value to increase. Meanwhile, owners can use the income gain from rent to pay their mortgage. 

For some sellers, this is a variable choice, but it may not be for others. Consult a financial expert to see if using your primary residence as a rental property is a viable option for you. You might want to do some research on the legal aspects of selling a home with tenants. 

Key Takeaway

Individuals, couples, and families selling their homes early are unlikely to profit in the long run. Equity and property value take time to build, and sellers should anticipate receiving the same amount for their home as when it was first listed, or slightly more or less. Other selling fees, such as employing a real estate agent and broker, engaging a lawyer, and paying any taxes, can add up quickly.

Despite the fact that the odds are stacked against early selling, there might be an exception. Early sellers can make huge profits in some situations if the market has risen dramatically, increasing the value of their homes. This is especially true if they intend to relocate to a more affordable place.

Take the time to assess whether you can afford to sell your home early and whether it is genuinely worth it before calling a real estate agent and listing it for sale. Consider whether you are truly willing to pay land transfer taxes, real estate fees, legal fees, and other expenses, especially if you only get back what you paid for your home originally.

Schedule a consultation with one of our expert real estate agents.

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