Home Buying: Is the ‘Five-Year Rule’ Still Relevant?

Posted by Dan Wolf on Thursday, April 9th, 2015 at 8:17am.

If you plan to live in a home for less than five years, many experts say you should follow the “five-year rule” for home buying. The rule says you should not buy a home unless you intend to own it for at least five years. With the booming real estate market in Anchorage, Alaska and the fact that many homebuyers would consider renting out their homes in the future, the five-year rule is not as relevant. According to an article by RealtyTimes, the concept of the five-year rule relates to home equity. In order to have the money to pay for closing costs when you buy a new home or sell your old home, you need either cash or home equity from the sale. Depending on the health of the real estate market, you may quickly build equity in your home.              

•    Turning your home into a rental

A lot of baby boomers gravitate to Anchorage, Alaska to buy retirement homes. Whether you are buying a home in Alaska as a primary residence or a second home, you may see potential with the rental market. Some baby boomers rent out their home to relatives or plan to leave their second home as part of an inheritance. The five-year rule isn’t relevant if you may eventually use the property as a rental.

•    Letting the market pay you

During the housing decline, the values of homes in Alaska and around the country experienced a dip. Now that home values are recovering, it’s easier to enjoy greater home appreciation due to the overall housing market. Other ways to build up equity in your home include putting down a hefty down payment, making an all-cash purchase or paying down your mortgage early.

•    Avoiding a short sale or foreclosure

Few people want to get into home buying only to go into foreclosure a few years later. The five-year rule can definitely prevent a short sale or foreclosure because it’s less likely you will be upside down on your mortgage. At this time, the tax ramifications of a short sale or foreclosure depend on lawmakers. According to a publication by the IRS, normally you owe taxes on canceled or forgiven debt, which is the case with a short sale or foreclosure. However, the Mortgage Debt Relief Act of 2007 applies to tax bills for 2007 through 2014 so that debt reduced through mortgage restructuring or foreclosure would be excluded. Lawmakers may or may not extend the relief for 2015 and beyond.

The five-year rule doesn’t apply to most investors such as mom and pop investors who want to fix-and-flip a foreclosure or turn a home into a rental for passive income.

At Wolf Real Estate, we help sellers in Anchorage Alaska show and market their homes. For more tips on home buying as a long-term strategy or for a quick fix-and-flip, please contact us at 907-248-9653 or visit us online at www.anchoragehomesearch.com.

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