Selling your primary home without living in it

Question

I already own a house and I am booking a new construction house. I am planning use it as my primary home. However, I do have a question can I sell the house without staying in it for a single day? Are there any law on how many days/months I should wait before selling it. I am aware of the tax law and pre-payment penalty.

Answer 1

You can legally sell a house twenty minutes after you buy it, if you or the buyer can have the documents prepared that fast. You will not be eligible for certain tax benefits on any profits you make. The house was never really your "primary home" if you never lived in it, but a house does not need to be a primary home for you to sell it - that matters for some mortgages, and in some tax situations.

People doing "house flipping" often sell a house a short time after buying it, indeed that is much of the point of "flipping". There is nothing criminal or unlawful about doing that, as long as you do not deceive anyone involved in the transaction about the length of your ownership of the house or the time you lived in it. (such deception might be fraud, if the matter is material to the transaction, which it might be.)

Arizona law does require disclosing "material information about the property that the seller actually and personally knows of". The Arizona Association of Realtors has drafted a disclosure form, the Residential Seller's Property Disclosure Statement which is often used for this purpose, but is not specified by law. This does include a line on which the seller is asked to disclose the date that the seller purchased the property. But as long as this disclosure is made honestly, it does not block a sale. In fact, the date of previous purchase is normally a matter of public record, and is included in real estate listings, so disclosure should be redundant, but is nonetheless safer. (This was called to my attention in a comment by user Mindwin.)

What made you think there might be a minimum stay?

Answer 2

can I sell the house without staying in it for a single day? Are there any law on how many days/months I should wait before selling it. I am aware of the tax law and pre-payment penalty.

U.S. Income Tax Considerations

The primary tax consideration when selling a primary residence, is that a significant amount of capital gain on the sale of a primary residence is excluded from federal income taxation (and from state income taxation in states where the state income tax based is derived from the federal income tax base) if two main timing conditions are met:

1. Each owner of the residence benefitting from the tax break must have lived in the home for two of the five years before the residence is sold, and

2. Each owner of the residence benefitting from the tax break must have owned the home for two of the five years before the residence is sold.

There is no getting around the requirement that you must actually physically live in a house for two years of the last five years to qualify for the exclusion of gain on the sale of a personal residence, even if the residence is your legal domicile for the entire time.

For example, if you spent four of the past five years in a nursing home, expected to return to your primary residence when you got better, or in prison due to a felony conviction, or at a military base away from your house, due to a deployment, unless you fit within one of the specific statutory exceptions, you don't qualify for the exclusion of gain.

Requirement #1 and Requirement #2 are independent of each other. You could live in a house for two years, move out, buy the house six months later, rent the house for two more years, and sell the house within six months of that date and still qualify. Also, requirements #1 and #2 don't have to be satisfied in the same way for every owner. As long as each owner independently satisfied requirement #1, and each owner independently satisfies requirements #2, their part of the capital gain is eligible to be excluded from income up to the dollar cap of the law.

There are some special circumstances when ownership or occupancy for less than two years can be partially excused and a residence owner can get a prorated exclusion of gain for the number of months that the owner qualifies.

There are also special rules for how to treat capital improvement investments in the residence, and depreciation deductions taken during periods when the residence is rented, during the five year look back period.

But, generally speaking, this tax break is lenient enough that someone can buy a fixer upper house, do a partially do it yourself renovation of the property, sell the house more than two years after it was purchased (while living there during the renovation), and still treat all or almost all of the gain as tax free up to the dollar caps on this tax break.

This is governed by Internal Revenue Code Section 121, and is explained in IRS guidance at its website that has the legal force of a tax regulation in most cases.

Another important distinction is that, generally speaking, property held for more than a year]2 is subject to taxation at a much lower long term capital gain tax rate than property held for less than a year. For purposes of short term v. long term capital gains, duration of ownership is all that matters, and whether you resided there or not is irrelevant.

So, if you buy a residence and then resell it less than a year later, not only do you not receive the exclusion of gain on the sale of a primary residence, you also pay any capital gains taxes on the higher short term capital gains tax rate. And, in hot real estate markets, such as Denver's, there can be substantial appreciation in residential real estate in less than a year, even if there are no meaningful improvements made to the property.

State Taxes and Closing Costs

There are also state law and state tax considerations that hinge upon whether you occupy your primary residence or not.

If you spend less than half of your nights in a year in a state you are generally taxed on a slightly less favorable basis as a non-resident of the state for income tax purposes.

Many states impose different property tax rates or provide special partial property tax exemptions for owner occupied housing that is either not available at all, or is pro-rated, if you spend fewer than half of your nights in a year actually residing there.

There are a small, but growing number of jurisdictions that impose what is known as a pied-a-terre tax which is a tax imposed on a residential property that is not occupied by someone, either you or renters, for at least half of the year, in addition to regular property taxes, in order to encourage people to not leave perfectly good housing unoccupied which contributes to a housing shortage. Sometimes this is pro-rated instead.

And, there are also quite a few jurisdictions that impose a transfer tax on the sale of real estate, which is small small percentage of the sale price of real estate as a sales tax, in addition to any capital gains taxes involved. When there is a transfer tax, there is a tax incentive to hold the property rather than to sell it, so the transfer tax you incur per year of owning the property is lower.

Similarly, while it isn't truly a transfer tax, there are closing costs and realtor's commissions associated with buying or selling a house which are basically the same whether you have held the property for a long time or a short time, and the longer you own the home, the less your lifetime expenditures for closing costs will be.

If you move from one state to another, or in some cases from one county to another, you must re-register your car and pay additional filing fees for that process.

Homestead Exemption And Other State Benefit Considerations

Many states have a homestead exemption for equity in a primary residence from creditors claims that is only available if you or one of your family members resides in the primary residence at the time that the availability of the homestead exemption is evaluated.

Similarly, actual residence for periods of time from thirty days to a year, are pertinent to eligibility to vote, the duty to serve on a jury in a county, the jurisdiction of course of you for purposes of probate, divorce, or other lawsuits, state tuition rate eligibility at public colleges and universities, Medicaid eligibility, Alaska State Dividend benefits, and favorable rates for in state people for hunting licenses and/or state parks, for example.

If there is a state or local law affordable housing subsidy that you benefitted from when you purchased the house that you had to have a primary residence to qualify for, and then you promptly resell it, you may have to return the benefits you received from the program or pay some other penalty, or if someone proves that you lied about an intent to use it as a primary residence in the first place you could be prosecuted for fraud criminally, although that is usually quite hard to prove beyond a reasonable doubt without some inadvertent express confession from you or an ability to show you have a pattern and practice of acting in a particular way.

Financing And Truthfulness Considerations

As you note, if you purchase the home in part with debt financing, there are often points that are paid which are nonrefundable to obtain the loan, even if it is paid off early, and in some instances (although much less frequently) there is a pre-payment penalty for early payment in full of the loan.

In an extreme case, if you apply for a mortgage loan representing that you intended to use the residence as your primary residence to qualify for some government loan program, and never live there under circumstances that strongly suggest that you never intended to live there in the first place, despite stating under oath that you did, you could be denied the benefit of the loan program or could even be prosecuted for mortgage fraud criminally.

Bottom Line

All of this said, however, if you own a residence, in general, you can sell it at any time, even if you have never set foot in it.

There may be consequences to your decision in terms of taxes, transaction costs, or eligibility for government affiliated programs, but if you didn't make any false statement of fact or promises that you did not intend to perform about residing at a property when you made it, you are free to do so.

There have been residences purchased and then sold the same day in rare appropriate circumstances when a sudden discovery requires a change in plans, and a sudden opportunity to sell immediately presents itself.

One example of how this might happen is that a couple buy a home in contemplation of getting married, an ex of one of the people getting married shows up to the wedding and the ex and that member of the couple run off with each other calling off the wedding. To resolve the situation amicably, they promptly agree to sell the house through the realtor they used to buy it and in a hot market it is under contract within days and sold a few weeks later. It could go faster in principle, but getting the paperwork together any faster is usually challenging as a matter of just plain old logistics and staffing at the title company and at the bank the new buyer is financing the purchase with.