Downsizing in Retirement

Sylvia Salguero, Financial Adviser

Downsizing In Retirement

As you get older and closer to retirement, you start to re-evaluate what is the highest priority at this stage in life.  Health and family are much more important than a larger home with a big backyard and a pool.  Are you at the stage in life when you begin to consider downsizing or moving to another location?  

Choosing less space often has to do with a desire to live simpler, with less stress, whether you’re retiring or just want a low-maintenance lifestyle.  When children grow up and move out of the family home, for example, Mom and Dad are left with an empty nest that is too big for them.  Or if adult children have moved out of the area, parents may want to live closer to them and the grandchildren.

Sometimes the choice to downsize isn’t actually a choice.  Some life events, such as a divorce or unemployment, are unexpected and force you to find a smaller home for financial reasons.

According to a recent TD Ameritrade Survey, 42% of preretirees are likely to downsize.  About 25% of respondents prefer to move to warmer climate, while 17% are relocating to be closer to loved ones. 

Retiring with a lower mortgage payment, lower property tax, smaller place to clean and maintain could be very appealing.

Obviously, cost needs to be examined closely when considering downsizing.  Before beginning the actual process, homeowners should run the numbers to make sure it all makes financial sense.  Consider the costs associated with selling your home: (preparing the house for sale, agent’s commission, moving cost, etc.)  Apply the same to the purchase of the smaller home or condo. 

Will you have to pay tax on the sale?  Under current law, if you sell your principal residence for a profit, up to $250,000 of that capital gain can be excluded from tax.  Married couples filing a joint return can exclude up to $500,000.  This means that many people won’t have to pay capital gains tax at all.  However, that may not always be the case.  Those who have owned their homes for decades or live-in areas that have experienced considerable appreciation, could face a significant bill.

To determine capital gains on the sale of your home, subtract your cost basis from the selling price.  But what exactly is your cost basis?  It’s not just the purchase price.  Your cost basis can include certain settlement fees, closing costs and commissions associated with both the purchase and the sale—excluding escrow amounts related to taxes and insurance, etc.  Add to this the cost of significant capital improvements (but not repairs) you made over time for renovations, additions, roofing, landscaping and other upgrades.  All of these improvements will increase your cost basis, and therefore lower your potential tax liability.  Hopefully, you’ve kept good records because this can add up.

There are some things that can reduce your cost basis, which increase your profit, and potentially your tax bill.  For example, if you received tax credits for energy-related improvements, you have to subtract those amounts from your cost basis. 

There may be updates to regulations and/or tax implications of which you are not aware at the time you decide to downsize, so it is best to consult with your tax advisor, and your financial advisor, before you begin the process.

Sylvia Salguero

Financial Adviser

Sylvia Salguero joined Albitz/Miloe in 2001, guiding families, especially women and small businesses with the development of investment strategies, portfolio construction, as well as implementing solutions to help meet their goals and objectives. Sylvia has served on committees of various charitable and religious organizations.

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For a comprehensive review of your personal situation, always consult with your legal or tax advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.