Downsizing Your Home: Financial Pros and Cons
Moving to a smaller home can lower costs and free up equity, but it is not right for everyone. Weigh the financial and personal factors before you decide.
The short version
- Downsizing may lower housing costs and free up home equity.
- Moving costs, taxes and the price of the new home can reduce the savings.
- Consider location, accessibility and closeness to family and services.
In this guide
Many retirees consider moving to a smaller home, whether to reduce costs, simplify upkeep or be closer to family. Downsizing can bring real financial benefits, but it also involves costs and trade-offs. Thinking through both sides can help you make a decision that fits your goals.
Potential financial benefits
Lower ongoing costs. A smaller home may mean lower utility bills, property taxes, insurance and maintenance.
Unlocking home equity. If you sell a home with significant equity and buy or rent something less expensive, you may free up money to add to savings or cover living expenses.
Paying off a mortgage. Some people use proceeds from a sale to buy a smaller home outright, eliminating monthly mortgage payments.
Reduced upkeep. Less yard work and fewer repairs can save money and energy.
Potential costs and drawbacks
Transaction costs. Selling and buying a home involves real estate commissions, closing costs, inspections, repairs to prepare for sale and moving expenses. These can add up to a significant percentage of the home's value.
Price of the new home. Smaller homes in desirable areas or retirement communities are not always much cheaper. Condominiums and some communities have monthly fees that can increase over time.
Taxes. Many homeowners can exclude a large portion of the gain from the sale of a primary residence from income taxes, up to $250,000 for single filers and $500,000 for married couples filing jointly, if they meet ownership and use requirements. Gains above those amounts may be taxable. Consult IRS Publication 523 or a tax professional.
Emotional impact. Leaving a home filled with memories can be difficult.
Questions to ask
About finances
- What would I net from selling my current home after all costs?
- What would my total monthly costs be in the new home, including fees?
- How would the move affect my property taxes? (Some states allow older homeowners to transfer certain tax benefits to a new home.)
- Could selling affect my eligibility for any benefits?
About lifestyle and health
- Is the new home accessible, with single-floor living, wide doorways and a walk-in shower?
- Is it close to family, friends, doctors, shopping and public transportation?
- Are there opportunities for social connection nearby?
- Will it meet my needs for the next 10 to 20 years?
Alternatives to consider
- Aging in place with home modifications
- Renting instead of buying, which offers flexibility
- Moving in with family or creating an accessory dwelling unit
- Home sharing with a roommate to split costs
- Reverse mortgages, which have significant costs and complex rules; HUD requires counseling before getting one
Making the move easier
- Start decluttering early, one room at a time.
- Measure your new space and decide which furniture will fit.
- Ask family which items they would like to keep.
- Consider a senior move manager, a professional who helps with planning, sorting and moving.
- Get several estimates from licensed movers.
Terrameritavi is an independent publication. This article is general information, not financial, tax or real estate advice.
