If you think now is a good time to buy a home, it is important to make sure that you are happy with staying there for a while. In fact, you should make sure that you are likely to stay on the property for at least two to five years.

If you are not sure if this is the case, there are two main reasons why it is better to rent a property than buy it. Read on to see what they are.

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1. Houses are associated with high transaction costs

Buying a home can get expensive because of the closing costs you will have to pay. You may owe mortgage loan fees, transfer taxes, and a variety of other up-front expenses.

And selling a home can get even more expensive. In fact, when selling a property, you could be forced to spend up to 6% of the property's value on commissions that are split between the buyer's real estate agent and the seller's agent.

Because of the high costs associated with a real estate transaction, you can lose a lot of money on your transactions unless you have stayed in your home for a while. Hopefully after a few years the real estate values ​​in your home will have risen enough that you can sell for little profit and cover all of these upfront costs.

There is another potential problem, depending on the size of your deposit. If you sell too quickly after making the purchase, it is possible that you will not get a high enough price to pay off your mortgage and transaction costs.

This is especially true because many mortgage loans are structured so that you pay most of the interest upfront and your principal balance doesn't go down very quickly.

2. You could expect higher capital gains taxes

Sometimes it is even possible to sell a property profitably after a short period of time – especially if the housing market in your area is hot.

Unfortunately, if you haven't owned and lived in your home for at least two years in the past five years, you're missing out on the cheap capital gains tax rules that can apply to real estate.

See, you can lock out up to $ 250,000 in profits (or $ 500,000 for married joint applicants) which means the IRS wouldn't take its share of that money. But that is only possible if you have owned the house long enough.

If you sell your home after having owned it for less than a year, you could be subject to short term capital gains taxes on any profits you make and would not receive this exclusion. The short-term capital gains tax rate is your ordinary income tax rate. The long-term interest rate after a year and day of owned assets is lower for most people – but of course, you can still end up paying more if you don't qualify for exclusion because you don't own and has lived in the property for at least two years in the past five years.

You don't want to end up with a huge tax bill or huge transaction costs that you can't pay just because you bought a home and sold it too early. So, before buying, seriously consider whether you want to stay for a while. If you don't, short term rental may be a better financial choice.

source https://seapointrealtors.com/2021/07/25/2-big-reasons-it-doesnt-pay-to-buy-a-home-if-you-wont-live-there-a-while/

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