The children have moved out, and the four-bedroom house now has three rooms nobody uses. The stairs are harder than they used to be, and the property taxes keep rising. Downsizing seems like an obvious way to free up money and simplify life. Sometimes it is. Sometimes the costs of moving eat up more of the savings than expected.
Key Takeaways
- Selling and buying a home involves substantial transaction costs, including agent commissions, closing costs and moving expenses.
- Married couples can generally exclude up to $500,000 of gain on the sale of a primary home ($250,000 for single filers) if ownership and use tests are met.
- Compare ongoing costs — taxes, insurance, utilities, maintenance and fees — not just purchase prices.
- Consider location, accessibility, community and future care needs as well as finances.
This article is general information. Consult a tax professional and real estate professionals for your situation.
What downsizing can save
The financial case usually rests on:
- Releasing home equity, which can be added to retirement savings
- Lower property taxes
- Lower insurance premiums
- Lower utilities
- Less maintenance and repair
But savings depend on what you move to. A smaller home in a more expensive area, or a new condo with high association fees, may not cost much less.
The transaction costs
Moving from one home to another commonly includes:
- Real estate agent commissions when selling
- Seller closing costs, such as transfer taxes and title fees, depending on location
- Buyer closing costs on the new home
- Repairs and preparation to sell
- Moving costs
- Furniture and setup for a different space
Together, these can amount to a significant percentage of the home’s value. Estimate them before assuming downsizing will free a specific amount of cash.
The capital gains exclusion
If you sell your primary home at a gain, US tax law generally allows you to exclude:
- Up to $250,000 of gain if single
- Up to $500,000 if married filing jointly
To qualify, you generally must have owned and used the home as your primary residence for at least two of the five years before the sale. Gain above the exclusion may be taxable.
Keep records of home improvements, which can increase your cost basis and reduce taxable gain.
Compare ongoing costs
Make a side-by-side comparison of yearly costs:
- Property taxes
- Homeowners insurance
- Utilities
- Maintenance and repairs
- Homeowners or condo association fees
- Transportation costs, if moving changes driving distances
Some states and localities offer property tax relief for older homeowners. Check whether you would keep any benefits by moving.
Non-financial questions
Accessibility. Will the new home work as mobility changes? Single-level living, wider doorways and accessible bathrooms can allow you to stay longer.
Location. Is it near family, friends, healthcare and shopping? Can you get around if you stop driving?
Community. Moving can mean leaving neighbours and social networks. Consider how you will build new connections.
Space. Is there room for hobbies, visitors and belongings you want to keep?
Future care. Some retirees consider moving to communities with services or continuing care options.
Timing
- Market conditions affect sale and purchase prices.
- Selling first or buying first affects risk and the need for temporary housing or bridge financing.
- Health and energy — moving is easier while you are able to manage it.
Decluttering
Downsizing usually means parting with belongings. Start early, room by room. Offer family heirlooms to relatives, sell or donate items, and consider professional help from move managers who specialise in older adults.
Frequently Asked Questions
Is renting an option instead of buying? Renting can provide flexibility and fewer maintenance responsibilities, but rent can rise over time.
Can I use home equity without moving? Options such as home equity loans or reverse mortgages exist but have costs and risks. Consider advice before using them.
How much house is “right-sized”? It depends on lifestyle, visitors, hobbies and budget.
Should I downsize before or after retirement? Some people downsize before retiring to reduce costs; others wait to see how they want to live.
The bottom line
Downsizing can release equity and simplify life, but only if the numbers and the location work. Add up the full costs of moving, compare ongoing expenses, and think about how the new home will serve you for years to come.
