Whether you should buy your next home or sell your current home first really depends on whether you can afford to purchase your next without the proceeds of your current home. This isn’t to say that you have to be able to qualify for a brand new loan as if you were a first time buyer, rather you need to be able to at least come up with the down payment and closing costs on your own and you need to be able to cover any shortfall should your existing home not later sell for what you had anticipated it would sell for.
Imagine this scenario, you qualify for a $300,000 mortgage and you purchase a new home worth that amount since you can afford the down payment and closing costs. The mortgage on your current home is $200,000; the fair market value is $250,000; and your equity in it is $70,000, including a $20,000 increase in fair market value since you purchased the home. After you purchase your new home, you put your old home on the market, but the market has softened since your home was appraised. The house sits on the market for a few months, during which time you are paying two mortgages, and to finally move it, you have to sell it for $230,000. Suddenly, you have $40,000 less than you thought you did when purchased the new home. If that was $40,000 that was going towards the purchase of your new home, then you’re in a bit a trouble if you can’t afford the higher mortgage payments.
Think it won’t happen to you? Think again. The real estate market is one of the last, classic boom and bust markets. When markets correct they tend to do so suddenly and severely, and someone doing business during the transition can get burned. There are two ways to avoid this situation. You can sell your old house first and negotiate a decent lead time to find a new house, or you can hold off selling the old house, but making closing on the new house contingent on you finding a buyer for the old house who is ready, willing, and able.
It is always worthwhile to consider the tax consequences of any real estate transaction, and, fortunately, it makes no difference tax-wise whether you sell your old home or buy your new home first. Either way the proceeds of the sale of the old home (up to a certain amount) are tax-free, even if you don’t use the proceeds to purchase the new home.