Personal Finance

Does It Make Sense to Downsize Your Home in Retirement?

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by Alli Thomas

Jul 15, 2019

My parents have both retired in the last two years. They’ve been thinking about selling their home, where they’ve lived since 1987, and moving into a smaller condo.

 

My mom likes the idea of having a homeowner’s association take care of outdoor work like plowing snow and mowing the grass. But my dad is not sure he’s ready to give up his beloved yard and garden. He also worries about living in much closer quarters with neighbors.

 

But when it comes to downsizing, they should be thinking of things besides selling their snowblower and lawnmower and how to avoid nosy neighbors. Here are some considerations:

 

Will it save me money?

 

While a smaller home may mean paying less in utility bills and (perhaps) property taxes, you still need to factor in the other costs associated with selling your home and buying a new one. Consider realtor commissions, closing costs, and moving expenses. These can add up quickly, and many people overlook them.

 

Can I part with all my stuff?

 

Less square footage usually means less storage space. When you’ve spent a lifetime accumulating things, it can be surprisingly hard to part with them, especially if they have sentimental value. You could always check into renting at a storage facility, but that will also cost money.

 

What are the tax consequences of selling for a profit?

 

If you make a profit on the sale of your home, the tax code allows you to exclude up to $500,000 in capital gains for married couples ($250,000 for single or married filing separately).

 

You’ll have to figure out the difference between what your home’s sale price will be and what its cost basis (the purchase price you paid plus the cost of all permanent improvements you’ve made) is.

 

There are a few other catches. First, you must have lived and owned the home for two (non-consecutive) out of the last five years that ends on the date of sale. Second, you can only claim an exclusion every two years.

 

How long will I be able to stay in my new home?

 

The optimal home configuration for you when you’re in your 80s may look VERY different from the place you downsize to when you’re in your 60s. One thing my mom is concerned about is stairs. She’s only 70 now, and in good health, but she wants to avoid moving to a home with multiple levels. There’s a good chance your mobility and vision situation may change over the next couple of decades, so keep that in mind when deciding where to move.

 

If you’re thinking of downsizing, we can help you! Click here to set up an appointment with one of our financial advisors and find out about other things to consider before you take that step.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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