Considerations, Opportunities, and Impacts of Selling a Single-Family Home

With higher interest rates, home prices have leveled off or even gone down in some areas. But those same higher rates can make a new home purchase less affordable despite a lower price. No one wants to miss out on a deal, especially if there’s a need to upgrade your current house or relocate for work.

So how should one evaluate the decision to buy in this market? A look at your real estate assets in the context of your full financial picture could help you develop a strategy that’s aligned with your personal balance sheet and bigger picture personal financial plan.

This will include assessing the tax and cash flow impact of what to do with your current home and how to acquire your new one.

A Look at the Current Residential Housing Market

Some themes of the current housing market include:

  • Higher interest rates
  • Low inventory
  • Potential deals

Higher Interest Rates

It’s no secret interest rates have risen dramatically over the past eighteen months. And the increase in rates can be seen across mortgage types—fixed or adjustable—and terms—7, 10, 15, or 30 years.

Low Inventory

While new home builders continue to add supply, existing home inventory remains very low. In large part, this can be attributed to what many call the lock-in effect.

The lock-in effect occurs when an existing homeowner is reluctant to sell because they have a low interest rate locked in and choose to stay with their current low rate or can’t afford to sell their home and purchase a new home because the interest rate on the new mortgage would be so high that they can’t afford the new monthly payment.

Potential Deals

The S&P/Case-Shiller Home Price Index shows that some of the areas that experienced the greatest run up in home prices over the last several years have seen prices go down since 2022. This is luring some buyers back into the market.

What’s the Opportunity?

If one can avoid the financial pitfalls, now may be a good time to benefit from stagnant or lower home prices to upgrade your personal residence. Homeowners will want to carefully analyze both the sell-side and buy-side of this decision.

Let’s assume a buyer who owns a three-bedroom house in a good neighborhood with a 30-year fixed mortgage at 3% could sell for $1.5 million, netting a gain of $300,000 before considering if the gain would qualify for exclusion. The buyer wants to upgrade to a four-bedroom.

A suitable property with a motivated seller is available for $2 million. If we also assume the buyer has good credit and $5 million in taxable investments including stock, what questions should they ask before deciding? Let’s look at a few potential scenarios for how this could play out below and the subsequent risks that should be considered.

Sell Now and Purchase with a Mortgage

The traditional approach in a normal housing and interest rate environment might be to sell the current home and buy the new home, taking out a new mortgage. A buyer who owns a home and used it as a primary residence for at least two years of the previous five years could exclude up to $500,000 of gain from their federal income taxes for a married taxpayer.

This would make the sale federal income tax free, given the above assumptions. Since the new mortgage rate would be much higher, the monthly mortgage payment would increase significantly.

This might be worth it if the new home is selling at a nice discount from normal market conditions. The sale of the old house might not sell for as much as hoped for, but since the new house is more expensive, the purchase discount could exceed the sales discount.

Sell Now and Purchase with Cash

The person in the scenario above could sell their current home and some stock to pay cash for the new one. They may be able to avoid tax on the sale of the home if they qualify to exclude the gain under Section 121 of the Internal Revenue Code. Similarly, taxes may be owed if there’s a taxable gain in the stock position sold, so they may look to sell stock that hasn’t appreciated or offset the gain with losses from other investments.

The homeowner could explore non-mortgage short-term financing options to pay in cash.

Rent Now and Purchase with Cash

Going back to the original scenario, assume the homeowner wants a new home at a good price but doesn’t want to sell the current home at a discount.

They could rent out the existing home at least until the market recovers. To qualify for up to $500,000 of federal income tax-free gain on the sale of the property, sell within three years of moving out.

At the time of sale, the homeowner owned the property and used it as a primary residence for two of the past five years. Keeping it longer than the three years would lose the primary residence gain exclusion, but they could still potentially exchange the rental for other business property to help avoid those taxes.

Possible Impacts and Risks

Each homeowner will have a different set of facts and circumstances to work through. The following are some questions to consider in partnership with a personal financial planner and real estate agent.

How Real Estate Holdings Affect a Long-Term Financial Plan

  • Are there liquid funds?
  • What target return on investment do the long-term financial goals need from the real estate?
  • What’s the risk of overconcentration in a local economy?
  • Could too much borrowing and use of leverage lead to financial stress or failure?

How Real Estate Holdings Affect the Owner

  • Is the home right for the family?
  • Does the owner want to be a landlord, and will the property be managed personally or by a property manager?
  • What additional liability or risks could a rental property introduce?
  • Is your city and state landlord or tenant friendly?


  • When will home prices resume their upward climb in the area?
  • Have mortgage rates peaked or might they move higher?
  • If they have peaked, when will they move lower?

Finances and Taxes

  • What’s the time frame for excluding gain on the sale of the current home?
  • What are the rules for deducting interest on a loan to purchase the new home?
  • Is it better to take out a traditional mortgage or use other lending methods to finance the purchase?
  • What are the tax rules for renting out the old home?

Next Steps

  • Evaluate real estate assets and whether the current home is a good long-term fit
  • Work with a local real estate agent to determine if there are desirable upgrade opportunities
  • Decide whether to sell or convert the current home to a rental or stay the course
  • Determine if the new property purchase will be cash or financed
  • If the purchase is financed, determine the option with favorable tax and cash flow implications
  • Analyze the proposed strategy for its impact on the long-term financial plan

We’re Here to Help

To learn more about considerations around making a move in this high interest mortgage environment and how to weigh the benefits and costs to your financial plan, contact your Moss Adams professional.

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