Is Downsizing Right for You? - By: Kathy Hower, CFP®

Is Downsizing Right for You?

Bedel Financial

Posted by: Kathy Hower, CFP® on Monday, February 12, 2018 10:00 am

2017 was the best year for existing home sales in 11 years according to the National Association of Realtors®. That’s quite an enticement for many homeowners to put their house on the market and downsize to a smaller home. It sounds like a smart move, but is it?

Once you get older and your children are no longer living at home, downsizing to a smaller house may sound appealing. Doing so could help simplify your life, reduce expenses, and possibly allow you to set more money aside for retirement. But before you make the move, you need to understand the pluses and minuses of downsizing for your particular situation.

The Upside

Moving to a smaller house can definitely lead to a simpler lifestyle. And simple is good, right? Lowering your overall spending can also enhance your sense of financial security after retirement. Here are some other potential pluses:

  • Lower or no monthly mortgage payment
  • Reduced maintenance and upkeep
  • Decreased utility costs
  • Increased retirement stability due to expense reductions

Along with the quantifiable upside to downsizing, a reduction in stress will be inevitable if you are able to get better organized and toss items that you no longer want or need when moving to your new home.

There’s Always a Downside

One common misconception is that downsizing means you’ll have extra cash in the bank after you sell your larger home and purchase a smaller one. While this sounds logical, it isn’t necessarily true. The cost of a smaller, newer house, featuring the latest amenities, often will cost more than you’ll receive from the sale of your existing home. Before you sign on the dotted line, determine if relocating would actually enhance your financial situation and not hinder it.

Here are a few costs you need to consider:

  • Realtor fees. When selling your home, these typically run 5 to 6 percent of the home’s sale price.
  • Improvements and renovations. What will you need to do to sell your existing home? Will it entail a small expense such as applying fresh paint or take a big chunk of change such as installing a new roof?
  • Moving costs.
  • Enhancements to your new home. You will likely want to make the home yours with new furniture, enhanced landscaping, and other improvements.
  • Condo or neighborhood association fees.

Don’t Forget the Tax Implications!

Consider the tax impact of downsizing before making a purchase offer on a new house. How does the property tax for the new home compare to your current residence? If you’re debating downsizing to a home in a different state, will you pay more or less state income tax? And what is the sales tax in that state?

You may also subject yourself to capital gains tax if the home you’re selling has appreciated in value. If you recognize appreciation in excess of $250,000 for individuals ($500,000 for married couples) when you sell your home, you will have to pay capital gains tax on the amount that exceeds the threshold in the year of the sale. If this is a possibility, consult with your tax professional.

Setting a Budget Is Key

Put together a comprehensive budget for the sale, purchase, and move. You’ll also want to include any anticipated expenses after you’re settled in your new home. This will be key for enhancing your financial security now, and in the future.

If you’ve made a good move and have actually reduced expenses by downsizing, make sure you put aside an appropriate amount for future necessities before spending it on little extras or vast luxuries. If you’ve downsized so you can travel more or work less, stick to your budget and don’t go overboard. It’s easy to do!

Summary

As with all major decisions, there’s more to downsizing than the financial impact. The emotional, social, and physical wellbeing of you and your family is also important to consider. If downsizing is in your future, be sure to consider the pros and cons before getting serious about your move. If this could be your last move, make sure it’s a good one!  

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