Financial Considerations When Downsizing
Downsizing from a larger family home to a smaller, more manageable property is a significant decision for many baby boomers. While emotional factors often take center stage, the financial aspects of this transition are equally important. Understanding these considerations can help ensure a smooth and financially beneficial downsizing experience. We at The Tucker Team are here to help you think through all of the financial implications using the handy list of topics below. We encourage you to engage us, professional tax accountants, lawyers, and your family members as questions arise (which they absolutely will!).
1. Understanding the Costs of Selling Your Current Home
Selling a home comes with expenses that are important to factor into your downsizing plan. These may include:
Agent Commission Fees: Typically 5-6% of the home’s sale price.
Repairs and Upgrades: Costs that are necessary to make your home market-ready.
Closing Costs: Often 2-5% of the sale price, including title fees, escrow fees, and taxes.
Planning for these costs ensures you’re not caught off guard when it’s time to finalize the sale.
2. Budgeting for Your New Home
When downsizing, you’ll likely save on the purchase price of your new home, but there are still costs to consider:
Home Price: Smaller homes in desirable areas or 55+ communities can be pricier than you’d think!
Homeowner Association (HOA) Fees: If moving to a condo or planned community, monthly HOA fees may apply.
Renovation Costs: Your new home might need modifications, such as adding aging-in-place features.
Moving Expenses: Packing, hiring movers, and transportation costs can add up.
We can help you create a detailed budget that factors in these expenses, so you know exactly what to expect.
3. Evaluating the Tax Implications
Downsizing can impact your taxes in several ways you’ll want to consider. Bringing these topics up to your tax professional can help you think through the timing and cost concerns:
Capital Gains Tax: If your home has significantly appreciated, you may owe taxes on the profit. However, the IRS currently provides an exclusion of $250,000 for individuals and $500,000 for married couples filing jointly if you’ve lived in the home for at least two of the last five years.
Property Taxes: Moving to a smaller home can reduce your property tax bill, especially if you relocate to a tax-friendly state or a community with lower rates.
Inheritance Considerations: Downsizing might affect the financial legacy you leave for your heirs, so it's wise to consult an estate planner/lawyer.
4. Unlocking Equity: Your Home as a Financial Asset
For many baby boomers, a home is the most significant financial asset. Downsizing allows you to unlock the equity you’ve built over decades.
Pay Down Debt: Use proceeds from the sale to eliminate mortgages, credit cards, or other debts.
Boost Retirement Savings: Invest the remaining equity to generate income in retirement.
Rent or Buy?: If you’re unsure about your long-term plans, consider renting. This option provides flexibility and may reduce upfront costs.
5. Saving on Long-Term Costs
One of the biggest financial benefits of downsizing is reducing ongoing expenses:
Lower Utility Bills: A smaller home costs less to heat, cool, and maintain.
Reduced Maintenance: Smaller homes and newer builds typically require less upkeep.
Insurance Savings: Homeowners’ insurance premiums are often lower for smaller properties.
6. Avoiding Common Financial Pitfalls
We have seen many clients stop after number 5 above. The following three tips are the most important part of this entire post. DO NOT SKIP THESE!
Overestimating Savings: While downsizing can free up capital, don’t assume all expenses will disappear.
Ignoring Hidden Costs: Factor in closing fees, moving expenses, and potential renovations.
Skipping Financial Advice: Consult a financial advisor or tax professional to ensure your downsizing plan aligns with your long-term goals.
Final Thoughts
Downsizing is more than just a lifestyle change—it’s a financial decision that can significantly impact your retirement. By understanding the costs, planning for taxes, and leveraging the equity in your current home, you can transition to a new chapter with financial confidence.
If you’re ready to explore downsizing options, reach out to The Tucker Team. We specialize in helping baby boomers navigate this exciting stage of life. Together, we can create a plan that meets both your lifestyle and financial needs.